SE_IE_intro

SE_IE_intro - Income and Substitution Effects Introduction...

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Income and Substitution Effects- Introduction We need to understand the work-incentive effects of higher wages/income, taxes, and income maintenance programs… How to spend time: #1) leisure #2) work for pay in labor market One way we could analyze the work/leisure choice is by analyzing the demand for leisure hours. what determines the demand for a good? #1) opportunity cost- what you have to give up to attain the good (the price) #2) wealth/income a) normal good - income increases, demand for good increases b) inferior good - income increases, demand for good decreases #3) preferences the opp cost of leisure is the wage rate (what you forgo by leisuring for another hour) income effect - change in hours worked (H) resulting from a change in income (Y), holding wage constant IE is negative [(income ↑, hours worked ↓), (income ↓, hours worked ↑)] leisure is a normal good- income (Y) ↑, leisure (L)↑, so hours worked (H)↓ How do we know that leisure is a normal good? It is an empirical question. The conventional
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This note was uploaded on 09/13/2009 for the course PAM 2040 taught by Professor Lewis during the Spring '07 term at Cornell.

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SE_IE_intro - Income and Substitution Effects Introduction...

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