Question

You have been working a full-time job ever since you graduated from college. Back when you were two years old, your Great Aunt Petunia set up a trust in your name. You have known all your life that on your 30th birthday the trust fund would mature, triggering a payment to you of $500,000. True or False: After your 30th birthday, you work fewer hours than before your 30th birthday. Explain.

Answer 1

Correct Answer:

True

Explanation:

It I can be understood by the income & substitution effect upon the person. Initially, a person spends his time on work and leisure. When his wage increase, then, he works more to capitalize on the opportunity of higher wages and less time is spent upon the leisure. But, later on opportunity cost of leisure increases and income effects sets in. As a result, the more time is spent upon the leisure as cost of leisure becomes high.

Here, in the given case, wage does not increase, so substitution effect will be negligible. But, income increases due to the huge corpus of funds in a trust, so more time is spent on leisure due to income effect only. As a result, after 30^th birthday, the person works relatively fewer hours than before.