Compare and Contrast the Life Cycle Hypothesis and the Permanent

question 95

Essay

Compare and contrast the life cycle hypothesis and the permanent income hypothesis. Is there a basis on which one can judge between these two theories, or are they complementary? What are their respective implications for inequality in the income distribution?

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Definitions:

Sapphire Pendant Necklaces

Jewelry items consisting of pendants made from the gemstone sapphire, typically hung on a chain or necklace.

Income Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in consumers' income, expressed as a percentage change in demand divided by the percentage change in income.

Inferior Good

is a type of good whose demand decreases when consumer income rises, unlike normal goods, for which demand increases when income rises.

Supply Curve

A graphical representation showing the relationship between the price of a good or service and the quantity of that good or service that a supplier is willing and able to supply at various prices.