Question
In: Economics
Consider the function u = cl^2 (c l squared). When the individual works they earn $15...
Consider the function u = cl^2 (c l squared). When the individual works they earn $15 an hour and have 10 hours per day available for work. They receive non-labour income of $15 regardless of how much they work. What is their reservation wage? please show all work
Solutions
Expert Solution
Reservation wage:
This is the minimum wage for labor participation.
MRS, which is (MUl / MUc), should be calculated first
MUl = (d/dl) [cl^2]
= 2cl
MUc = (d/dc) [cl^2]
= l^2
Hence,
MRS = MUl / MUc
= 2cl / l^2
= 2c / l
Therefore,
If not work, the 10-hour period would be the leisure time (l). The non-labor income, $15, would be the c.
Reservation wage = MRS = 2c / l
= 2 × 15 / 10
= 30 / 10
= $3 (Answer)
Rahul Sunny answered 2 years agoRelated Solutions
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