1. Labour Supply: AL & Tutorial Questions

Question 1

Give 5 limitations of the simple individual labour supply model

Answer 1

• The hourly wage is assumed to be constant
• It is assumed that individuals have free choice of how many hours to work
• It is an individual decision (no interaction with other HH members)
• It is assumed that time can only be allocated to leisure or work
• There is no fixed cost associated with being in work (e.g. cost of commute)

Question 2

What is the reservation wage in the simple individual labour supply model?

(2 points)

Answer 2

The wage at which an individual is indifferent between working and not working

It is the point at which the slope of the indifference curve is tangential to the BC at the non-participation point