Suppose a person's utility for leisure (L) and consumption (Y) can be expressed as U = Y + L0.5. Assuming a wage rate of $10 per hour, show what happens to the person's labor supply curve when the person wins a lottery prize of $100 per day
What will be an ideal response?
Rearranging yields U = (Y* + 10H) + (24 - H)0.5 (24 - H)0.5. Maximizing utility with respect to H yields H = 23.9975 hours. Note: H is not a function of Y* because the marginal utility of leisure is independent of income. Thus the person's labor supply curve is not affected by winning the lottery.
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