For the question, define the total hours, L, supplied to a market as: L=èNTw where N is therelevant population, è is the fraction of that population that participates (works) in the market and Tw is the average hours of work of the participants. Use the labour-leisure model and the elasticities.
Assume a population of single individuals where the reservation wage is related to V as follows: w* = 10lnV - 50
a. Is Tc normal? Explain.
b. Assume income and substitution effects for hours of participants exactly offset oneanother and that lnV has a normal (bell curve) distribution; what is the shape of the supply curve of total hours with respect to the wage?
c. Suppose instead that the distribution of lnV is such that reservation wages range from 0 to 25 and that they are uniformly distributed over this range. What is the shape of the supply curve of total hours? What is the elasticity of total hours with respect to the wage?