Question

Assume that an individual wins a lottery. Assume also that the individual was working before the lottery win and had no other nonlabor income before the lottery win.

a) Using the basic static model of individual labour supply, discuss both graphically and explain in your own words how the lottery win will affect the individual’s level of hours worked. Discuss all relevant effects.

b) Is it possible that the individual decides to stop working following the lottery win? In your answer discuss the concept of reservation wages and add the individual’s reservation wage before and after the lottery win to your graph.

Answer 1

a) Using the basic static model of individual labour supply, discuss both graphically and explain in your own words how the lottery win will affect the individual’s level of hours worked. Discuss all relevant effects.

Ans. The individual demand curve would be as follows:

The demand for commodities would remain contant with the same set of principles even if the incomes go up. But with rise in income, there is another phenomenon that sets in motion, which is called Arthur's curve. In the Arthur's curve, when the income of an individual rises, the demand for essential commodities come down. In this case, the labourer would not consume more of food grains and pulses but more of luxury goods.  

b) Is it possible that the individual decides to stop working following the lottery win? In your answer discuss the concept of reservation wages and add the individual’s reservation wage before and after the lottery win to your graph.

Ans. The decision on to stop working is purely based on his consumption of non essential goods. The question here doesn't specify anything about the amount won in the lottery. If the amount is equallent to give him/her a per annum interest amount then is equavallent to the pre lottery victory earnings, it is an incentive for the labourer to quit working. If it doesn't suffice, the labourere would perhaps not quit working as yet.