Question

Suppose H=0.5w-5 is Mary's labor supply curve, where H is hours of work per week and w is the wage rate per hour. What is the "Reservation wage" for Mary that she requires in order to participate in the labor market at all? What is the wage elasticity of labor supply at w=100? Would Mary like to spend more hours on work if the wage rate increased to 150 per hour? why?

Answer #1

When H = 0;

0 = 0.5w-5

So, 0.5w = 5

So, w = 5/0.5 = 10

Thus, reservation wage is 10 below which Mary will not participate in the labor market at all.

Wage elasticity of labor supply =

And, w = 100; H = 0.5w-5 = 0.5(100) - 5 = 50 - 5 = 45

So, Wage elasticity of labor supply = (0.5)*(100/45) =
1.11

The wage elasticity of labor supply at w=100 is 1.11

Yes, Mary would like to spend more hours on work if the wage rate increased to 150 per hour because hours of work per week is positively related to wage rate and also the labor supply is elastic which means that as wage rate increases then labor supply will increase.

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