In 1981 Andrew Carnegie asserted that "parents who leave their children enormous wealth generally deaden their children's talents and energies and tempt them to lead less productive lives."
A) Evaluate this statement using the labor-leisure model and explain the effects of such inheritances on hours of work and leisure.
B) Some parents may link the inheritances to the actual amount earned by their children in the labor market. That is, the children can claim the inheritance only if their labor earnings exceed $50,000 per year. However, if their labor compensation is more than $150,000 per year the inheritance will be given to charity. Draw the budget constraint under the earnings-conditioned inheritance (scenario II).
C) Now assume that the parents are interested in the amount of time their children spend in the labor market. Under this scenario, the children will receive double the market wage rate if they work at least 25 hours per week, three times the market wage if they work between 30 hours and up to 45 hours per week, and only the market wage for any additional hour worked. Draw the budget constraint under the hours-of-work conditioned inheritance (scenario III).
D) Compare the welfare of the children when there is no inheritance whatsoever (scenario I) and under the two alternative scenarios (scenario II, scenario III). Are the children better off? Are any worse off? Explain.
[Note: For all the previous parts (a)-(d) assume that there is both a labor and a non-labor income component.]