Consider a worker who has preferences Consumption (C) and leisure  given by the cobb-douglas function: U (C, ) = Cba where a b = 1 Further assume they have a time constraint and budget constraint the same as in the first question i.e. C w = YN wT T = h  a) What is this worker's reservation wage as a function of YN , T, a, b? b) Given the result in a) answer the following questions: i) What happens to the reservation wage if b increases? (remember a b = 1 so if b increases a must decrease) ii) What is the economic intuition for this result? iii) Draw a graphical representation in C, -space of what happens in this case, including the budget set and indifference curves. b) Given the result in a) answer the following questions: i) What happens to the reservation wage if YN increases? ii) What is the economic intuition for this result? iii) Draw a graphical representation in C, -space of what happens in this case, including the budget set and indifference curves?

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a The workers reservation wage as a function of YN T a and b can be determined by setting the budget ... View the full answer