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g) Suppose now that an eoonometrician observes repeatedly draws (hm, mm) from Colin's labor supply and estimates the labor supply flmction with an 0L5 regression:
g) Suppose now that an eoonometrician observes repeatedly draws (hm, mm) from Colin's labor supply and estimates the labor supply flmction with an 0L5 regression: has = II + 131110: + Et- Is the model well specied? If the econometrician runs the model, what sign of 3 do you expect to nd? Dismiss. h) We are now interested in how the value function of the worker (that is, the utility function at the optimum h') varies with the wage in. For Hank (that is, A = 1), compute the derivative of the value function with respect to 111. (You can use the envelope theorem) What is the sign? Interpret. Now do the same for Colin (that is, A > 1), what is the derivative of the value flmction with respect to in, assuming that the reference point T does not my with in? What if the reference point moves with m (that is, T = wh')? Under what model this would make sense
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