Class02_29

Class02_29 - 02/29/2008 Class Notes (cover part of Chapter...

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02/29/2008 Class Notes (cover part of Chapter 8 in the textbook) Class Outline Work-Leisure Choice Work-Leisure Choice Q : How many hours should I work (daily)? If I work I have less leisure time but higher income: the trade-off is between income and leisure. Budget Line I 1 I 2 I 0 Leisure 24 1 Income
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Income= wage*(# of hours worked) Let I Income; w wage; l hours spent having fun! Then the budget line is: I=w*(24-l) Example: Let w=$5 I=120-5l ( B 0 : Income-time budget constraint) The optimal bundle of leisure and income is the point where the indifference curve I 0 is tangent to budget constraint B 0 . And I work: 24- l 0 hours. Graphically : I 1 I 2 I 0 Leisure 24 B 2 B 1 B 0 l 0 l 2 l 1 2 Income
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Suppose the wage increases to $6. The new equilibrium is achieved where the indifference curve I 1 is tangent to budget constraint B 1 . And I work: 24- l 1 hours. The increase in wage generates 2 effects: 1. Substitution Effect : w the opportunity cost of leisure increases
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Class02_29 - 02/29/2008 Class Notes (cover part of Chapter...

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