Economic theory pre- Q1. (Reference-Dependence and Satisficing) dicts that increases in wages normally lead to increases...

  

Transcribed Image Text:

Economic theory pre- Q1. (Reference-Dependence and Satisficing) dicts that increases in wages normally lead to increases in the supply of labor. However, a popular study shows that cab drivers in New York City work longer hours on days when their per-hour wage is low, and it explains this in terms of cab drivers with a target revenue for the day that acts as their reference point.¹ In this problem you are asked to show that the cab drivers' behavior can also be accommodated within the Satisficing model where the agent cares about hours worked and total income generated in a day, and his aspiration level is defined only by his target level of income. Formulate the model by doing the following: (i) Specify the choice domain. (Hint: the agent's choice alternative is not described by hours worked alone). (ii) Say precisely how the per-hour wage determines the agent's menu. (iii) Suppose that the agent's utility from working 9 hours at wage w is given by wq - 5q² (so he likes revenue but dislikes working) and suppose his aspiration level in any menu is determined his target of making a revenue of $500 in a day. Determine the agent's choice from menus corresponding to wages $20/hr. $50/hr and $100/hr respectively.² (iv) Point out how the choices relate to the finding in the study. Economic theory pre- Q1. (Reference-Dependence and Satisficing) dicts that increases in wages normally lead to increases in the supply of labor. However, a popular study shows that cab drivers in New York City work longer hours on days when their per-hour wage is low, and it explains this in terms of cab drivers with a target revenue for the day that acts as their reference point.¹ In this problem you are asked to show that the cab drivers' behavior can also be accommodated within the Satisficing model where the agent cares about hours worked and total income generated in a day, and his aspiration level is defined only by his target level of income. Formulate the model by doing the following: (i) Specify the choice domain. (Hint: the agent's choice alternative is not described by hours worked alone). (ii) Say precisely how the per-hour wage determines the agent's menu. (iii) Suppose that the agent's utility from working 9 hours at wage w is given by wq - 5q² (so he likes revenue but dislikes working) and suppose his aspiration level in any menu is determined his target of making a revenue of $500 in a day. Determine the agent's choice from menus corresponding to wages $20/hr. $50/hr and $100/hr respectively.² (iv) Point out how the choices relate to the finding in the study.

Answer rating: 100% (QA)

Answer i The choice domain consists of menus of hours worked and total income earned in a day The ag... View the full answer