The response of aggregate hours worked to changes in the real wage are a hotly debated...

Transcribed Image Text:

The response of aggregate hours worked to changes in the real wage are a hotly debated topic within the context of the RBC model. The following question looks at how two alternative (but both frequently used) preference forms have different levels of responsiveness. To keep the problem as tractable as possible, we study a static problem. Consider the following static household problem max u (c, 1-n) c,n u (c, 1-n) = s.t. c = wn Consider two alternative forms for u (c, 1-n) c²-7-1 1-7 u (c, 1-n) = 0. 1+x' 7>1 (n)¹+x) 1-y 1+X -11-27 (0 - 0 (0) (1) (MaCurdy) (GHH) (a) Derive the optimality conditions associated with the household's problem. (b) Consider the effects of an increase in the real wage. What is the behavior of hours worked under the different assumptions? What is the economic intuition for such behavior? The response of aggregate hours worked to changes in the real wage are a hotly debated topic within the context of the RBC model. The following question looks at how two alternative (but both frequently used) preference forms have different levels of responsiveness. To keep the problem as tractable as possible, we study a static problem. Consider the following static household problem max u (c, 1-n) c,n u (c, 1-n) = s.t. c = wn Consider two alternative forms for u (c, 1-n) c²-7-1 1-7 u (c, 1-n) = 0. 1+x' 7>1 (n)¹+x) 1-y 1+X -11-27 (0 - 0 (0) (1) (MaCurdy) (GHH) (a) Derive the optimality conditions associated with the household's problem. (b) Consider the effects of an increase in the real wage. What is the behavior of hours worked under the different assumptions? What is the economic intuition for such behavior?

Answer rating: 100% (QA)

a To derive the optimality conditions we first form the Lagrangian mathcalL uc 1n lambdac wn Taking ... View the full answer