Question

Please I need answer for This question and it is very important just nu.

Q. Assume that an individual wins a lottery. Assume also that the individual was working before the lottery win and had no other nonlabor income before the lottery win.

a) Using the basic static model of individual labour supply, discuss both graphically and explain in your own words how the lottery win will affect the individual’s level of hours worked. Discuss all relevant effects.

b) Is it possible that the individual decides to stop working following the lottery win? In your answer discuss the concept of reservation wages and add the individual’s reservation wage before and after the lottery win to your graph.

Answer 1

a) If an individual wins a lottery, it will reduce her working hours and raise leisure hours. A rise in unexpected income make her labor supply curve as backward bending which means that from portion A to B, income effect < substitution effect while from portion B to C, income effect > substitution effect.

b) It is quite possible that labor could stop working only if the lottery amount is too big that she and their family can survive for many years. After winning a lottery, there will be rise in reservation wage a labor would be willing to accept.