Answer to Question #65188 in Microeconomics for Kimberley Ah-Chong

Question

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?

Answer 1

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).