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In: Economics

8、Assume that utility depends on consumption c and leisure l , U(c,l) . (a) Define reservation...

8、Assume that utility depends on consumption c and leisure l , U(c,l) .

(a) Define reservation wage.

(b) “The reservation wage increases with (i) non-labor income, (ii) fixed monetary costs of work, (iii) fixed time costs of work, and (iv) the price of consumption.” Prove or disprove each of these four claims.

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Expert Solution

Ans

a) Reservation wage is the minimum wage at which the person wants to take up a job

b) Increase in non-labour income will increase reservation wage for taking a particular job because increase in non labour income increases both consumption and leisure for the person. So, to do him do a particular work requires higher wages, thus, increase in reservation wage.

Fixed monetary cost of doing a work will increase reservation wage as entering into job will lead to decrease in money due to fixed cost involve, so, the worker will want more wage to work so that he can get back on previous consumtion level.

Fixed time cost of money, it wil increase the reservation wage as increase in fixed time cost of money will decrease the value of wages he earn, so, to stay at the consumption level at which he is, reservation wage has to increase.

Price of consumption, price of consumption will pivot the worker's budget line downwards, so, to be at the same consumption bundle, he has to work nore leading to decrease in reservation wage.

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Rahul Sunny answered 2 years ago
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