Question #65188

Assume a population of single individuals where the reservation wage is related to V as

follows:

w* = 0.6V - 100

a. Is Tc normal? Explain.

b. Assume income and substitution effects for hours of participants exactly offset one

another and that V has a normal (bell curve) distribution; what is the shape of the supply

curve of total hours?

c. Suppose instead that the distribution of V is such that reservation wages range from 0

to 20 and that they are uniformly distributed over this range. What is the shape of the

supply curve of total hours? What is the elasticity of total hours with respect to the wage?

follows:

w* = 0.6V - 100

a. Is Tc normal? Explain.

b. Assume income and substitution effects for hours of participants exactly offset one

another and that V has a normal (bell curve) distribution; what is the shape of the supply

curve of total hours?

c. Suppose instead that the distribution of V is such that reservation wages range from 0

to 20 and that they are uniformly distributed over this range. What is the shape of the

supply curve of total hours? What is the elasticity of total hours with respect to the wage?

Expert's answer

Assume a population of single individuals where the reservation wage is related to V as

follows:

w* = 0.6V - 100

a. In this case Tc is normal.

b. If income and substitution effects for hours of participants exactly offset one

another and that V has a normal (bell curve) distribution, then the shape of the supply

curve of total hours will be positive and the curve will rise upward.

c. If reservation wages range from 0

to 20 and that they are uniformly distributed over this range, then the

supply curve of total hours will be almost horizontal and the elasticity of total hours with respect to the wage will be high (very elastic supply).

follows:

w* = 0.6V - 100

a. In this case Tc is normal.

b. If income and substitution effects for hours of participants exactly offset one

another and that V has a normal (bell curve) distribution, then the shape of the supply

curve of total hours will be positive and the curve will rise upward.

c. If reservation wages range from 0

to 20 and that they are uniformly distributed over this range, then the

supply curve of total hours will be almost horizontal and the elasticity of total hours with respect to the wage will be high (very elastic supply).

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