Reference no: EM132667687
Economic theory predicts 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 following version of the Satisficing model: the agent cares about hours q worked in a day (limited to 24hrs of course) and total income m generated in a day, and he aspires to reach a daily target level of $500 income without working more than 12hrs. If the target is not achievable then he maximizes utility, where the utility of working q hours and getting $m income is m - 5q^2 . 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) Suppose the agent earns a constant per-hour wage on any given day. Determines the agent's menu for a given per-hour wage w.
(iii) Determine the agent's choice from menus corresponding to wages $20/hr, $50/hr and $100/hr respectively.
(iv) Point out how the choices relate to the finding in the study.
1 Not that this is relevant for the question at all, but the paper is Camerer, Babcock, Loewenstein and Thaler, the Quarterly Journal of Economics (1997), and they assume there is no utility from revenue beyond the reference point, and negative utility below it.
2 If you need to determine the utility maximizing choice you may assume that q is a continuous variable and use calculus as needed.
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