Lecture 9 - Lecture Lecture9 LaborSupplyII Roadmap Roadmap

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cture 9 Lecture 9 Labor Supply II
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oadmap Roadmap come and Substitution Effects Income and Substitution Effects Examples Backward bending Supply curve The decision to work
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come Effect Income Effect fect of an increase in income (or wealth) Effect of an increase in income (or wealth) holding the wage constant. Income Effect = | 0 H W Y •On the margin, when the wage increases, there is an income effect because of all previous hours worked.
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bstitution Effect Substitution Effect fect of an increase in wage holding income Effect of an increase in wage holding income (or wealth) constant. Substitution Effect = | 0 H Y W •On the margin, when the wage increases, leisure becomes more expensive (opportunity cost) so people work more.
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EY Point KEY Point When we attempt to isolate the substitution effect (in the leisure income problem), we approximate holding income fixed by holding utility fixed instead .
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Decomposing the Effect (wage decrease) (Note: The full effect is smaller than the income effect) Original Point: Original utility curve and original Full effect: New $ termediate point: budget constraint utility curve and new budget constraint. 16W 1 Intermediate point: Old utility curve where the slope is the same as the new budget 16W 2 constraint The intercept on earnings axis falls as the wage falls. A decrease in the wage
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Lecture 9 - Lecture Lecture9 LaborSupplyII Roadmap Roadmap

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