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Suppose an hourly wage worker's preferences over leisure (L) and consumption of goods and services (C) is given by U(L, C) = VL+ VC Suppose
Suppose an hourly wage worker's preferences over leisure (L) and consumption of goods and services (C) is given by U(L, C) = VL+ VC Suppose each worker has 16 available hours per day to spend in work or leisure. Q1: Write down the budget constraint facing the worker. Let w represent the hourly wage facing the worker and M represent their non-labor income. Instead of setting pc = 1 as you usually would for a composite good, allow the "price" of consumption to be represented by pc in your budget constraint. Q2: Find the worker's labor supply function in terms of pc, to, and/or M. Q3: Find the formula for the worker's reservation wage in terms of po and/or M. Q4: Suppose the economy experiences inflation, causing po to rise. Describe in words what the model predicts would happen to labor supply, both in terms of the number of hours worked per person and in terms of the number of people working. Q5: What is the reservation wage of someone without non-labor income (M = 0)? Explain what this means in terms of their labor force participation
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