3-1 - I. II. Diagrams for Income and Substitution effects...

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I. Diagrams for Income and Substitution effects A. income- leisure diagram B. substitution- supply diagram II. Evidence A. Hours per week B. Labor force participation Wage increase: Income effect more leisure Substitution effect less leisure Income Leisure Wage decrease W1 > W2 Income B C A Leisure A’ H3 H2 H1 C’
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Income effect less leisure Substitution effect more leisure (leisure is cheaper b/c wage has gone down BA’ = initial budget constraint at Wage W1 AA’ = new budget constraint at W2 CC’ A constructed line parallel to BA’ that indicates income effect Individual Labor Supply Wage Income effect > substitution effect
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This note was uploaded on 09/28/2008 for the course ILRLE 2400 taught by Professor Smithr during the Spring '07 term at Cornell University (Engineering School).

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3-1 - I. II. Diagrams for Income and Substitution effects...

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