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2-27 - Chapter 6 Labor Supply Assumptions handout Income...

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Chapter 6: Labor Supply Assumptions – handout Income spent on goods $16,000 $12,000 $8000 [email protected]$1/hr BL @ $2/hr $4,000 0 8,000 Hrs of leisure Hours of work Leisure Income Spent on goods 0 8,000 0 1,000 7,000 1,000 x wage 2,000 6,000 2,000 x wage 8,000 0 8,000 x wage Budget Line = BL Income Spent on goods 16,000 I 3 I 2 I 3 BL @ $2/hr 8,000 Hours of Leisure Indifference curve: points of equal utility.
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The higher the indifference, the more utility What is the equilibrium? At the tangent point between the indifference curve and budget line, around $10,000 and 4,000 hours Non-wage income Income spent on goods $24,000 $16,000 $12,000 Budget constraint at $2/hr wage and $8,000 non-wage income $8000 BL @ $2/hr $4,000 0 8,000 Hrs of leisure Ques 1: Given the assumptions what will be the effect of non-wage increased non-wage income on hours of leisure? Intuition: When you win the lottery, you reduce your hours of work. Income effect : the effect of an increase in non-wage income The change in leisure consumption caused by a change in income – holding the price of leisure (wage rate) constant Ques 2: Given the assumptions, what will be the effect of a higher wage on hours of leisure?
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