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1) Use the income-leisure choice model to show that an increase in nonlabour income will increase...

1) Use the income-leisure choice model to show that an increase in nonlabour income will increase the individual's reservation wage if leisure is a normal good.

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Answer #1

In the model below, the worker is earning a reservation wage when the market wage is lower and so he prefers not to work. If the wage rate is higher, he has a higher utility at U2 and so he works and has fewer hours of leisure.

In the next diagram, we see that when there is an increase in non labor income from NL1 to NL2 we see that the worker will now have a higher reservation wage so that the worker is supplying less labor and enjoying more leisure given that lesiure is a normal good

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