Question

1.A retiree living on pension income typically has lower income than if s/he had kept on working. So why would anybody ever retire? And yet, many people retire from work. Use appropriate economic analysis to demonstrate and explain conditions under which it may be “a good move” to retire on pension income, even if that pension pays less than if the person had remained working. (Remember: you don’t collect pension income while working.) Be sure to illustrate how you can tell if it is a “good move.” Be sure to explain your finding(s).

Answer 1

1. The decision to work or retire depends on the marginal utility of working and the marginal utility of spending leisure time. If one derives a higher marginal utility by spending more leisure time as compared to working more, the person would like to spend the time on leisure. After a certain age, it might happen that the opportunity cost of work may be higher than the opportunity cost of spending time on leisure. A person can choose to retire when the opportunity cost of working is higher than the opportunity cost of taking the leasiure time or spending more time with family or on other hobbies. Retiring can be a good move when a person derives higher utility from spending the time with family, hobbies or other recreational activities after retirement.