文档介绍：CHAPTER 2
2-1. How many hours will a person allocate to leisure activities if her indifference curves between
consumption and goods are concave to the origin?
A worker will either work all available time or will not work at all. As drawn in Figure A, point B is
preferred to points A and C. Thus, the worker chooses not to enter the labor market. As drawn in Figure
B, point C is preferred to both points A and B. Thus, the worker chooses not to consume any leisure and
work all available time.
Figure A Figure B
Goods Goods
C
C
U1
U1
A A
U0 U0
B B
Hours of Leisure Hours of Leisure
2-2. What is the effect of a rise in the price of market goods on a worker’s reservation wage,
probability of entering the labor force, and hours of work?
Suppose the price of market goods increases from p to p′ and the person’s non-labor income is V. If she
chooses not to work, she can purchase V/p′ units of consumption after the price change, whereas she
could have consumed V/p units of consumption prior to the price increase. Thus, her endowment point
has moved from E to E′ in Figure A. As long as leisure is a normal good, the indifference curve is steeper
as we move up a vertical line, indicating that the slope of the indifference curve is steeper at E than at E′.
Thus, an increase in the price of goods lowers the reservation wage and makes the person more likely to
work.
1
Figure A.
Goods