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Unformatted text preview: = w + Y * Y + Nw = w + b (b) L = 2 Y N + N + Î» ( w + b-Y-Nw ) . Solve the F.O.Cs: MRS =-2 Y + 1 2 N =-w = MRT . N = 1 + 2 b 4 w + 1 2 . H = 1-N = 1 2-1 + 2 b 4 w . Y = w + b 2-1 4 . (c) âˆ‚H âˆ‚b =-1 2 w . The labor supply will decrease when unearned income increases. (d) âˆ‚Y âˆ‚b = 1 2 . The consumption will increase when unearned income increases. (e) âˆ‚H âˆ‚w =-1 + 2 b 4 w 2 =-11 4 w 2 . Positive eï¬€ect of increase in wage on labor supply and meanwhile negative eï¬€ect on leisure. It indicates that (1)either substitution eï¬€ect (-) and income eï¬€ect (-) are in the same direction and L is a inferior good; (2) or substitution eï¬€ect (-) dominates income eï¬€ect (+) and L is a normal good. 3...
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- Fall '10
- Supply And Demand, Trigraph, p1, P1 Q1