Coursenotes_ECON301

We first consider all of the combinations of coconuts

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Unformatted text preview: res the maximal level of profits measured in units of coconuts. If Bobby C's Inc. generates * dollars in profit, the money can buy * coconuts, since the price of coconuts is $1. Okay, Bobby C's Inc. has done their job. Given the wage, w, it has determined how much labour it wants to hire, how many coconuts it wants to produce, and what level of profits it will generate using profit maximization as an overriding philosophy. Now, Bobby C's Inc. mails out a dividend in the amount of * to its sole shareholder Bobby/Robinson. 147 THE POINT OF VIEW OF ROBINSON THE CONSUMER The very next morning Robinson awakens to find his dividend of * dollars. While eating his shredded coconut cereal, he considers how much he wants to work today and how much he wants to consume. He might just consume his endowment by spending his dividend of * on coconuts and take it easy or he may decide to work a bit today. So he heads down the beach into Bobby C's Inc. for a bit of work. We can describe Robinson the consumer's leisure-consumption choice using the familiar indifference curve analysis. But first, let's figure out Robinson the Consumer's budget constraint. He has his dividend of * without working and he can get w for every unit of labour he offers into the labour market. This income amount is equal to what he can consume in terms of coconuts... C = * + wL Now, Robinson the Consumer will try to achieve the highest indifference curve that he can taking into account his budget constraint... Coconuts Indifference Curve C* Profit = * Labour L* Since labour is a "bad" and coconuts are a good, the indifference curve has a positive slope. If we were to denote the maximum labour as TBAR as we did before, then the distance between TBAR and L* would be the demand for leisure. This is just like the leisure consumption choice except the horizontal axis has the origin reversed. 148 Robinson the Consumer's budget line has a slope of w and passes through the endowment point (0, *). Given the wage rate, Robinson the Consumer chooses...
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