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Note5 - Applications of Indierence Curve Analysis 1 Labor...

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Applications of Indi/erence Curve Analysis 1. Labor Supply A consumer has the utility function U ( x; ‘ ) , where x = quantity of good x; and = amount of leisure (measured in hours). Suppose T = h + ‘; where T is the total number of hours available and h is the hours of work. Let total income be given by I = wh + m; where w is the wage rate and m is non-labor income (e.g., inheritance, rental income). ° What is the meaning of the utility function? " If you are so smart, why ain°t you rich ?" ° Which variables are exogenous and which ones are endogenous? ° How are the optimal x ° and ° determined? ° How do x ° and ° depend on w and m ? ° Travel Support to encourage employment (Hong Kong Government Budget 2006, pp.20- 21, para 64) ° Minimum Wage: What will happen if the government imposes a lower limit w on the wage rate, i.e., w <w ? Will the consumer be better o/? ° Maximum Hours of Work: What will happen if the government imposes an upper limit h on the hours of work, i.e., h < h ? Will the consumer be better o/?

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Note5 - Applications of Indierence Curve Analysis 1 Labor...

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