Consumer Theory 5

Consumer Theory 5 - Economics 21 Intermediate...

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Economics 21 Intermediate Microeconomics Topic 2: Consumer Theory (v) Application 1: Labour Supply
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I. Applications Two key areas: (i) Labour Supply; (ii) Intertemporal Choice.
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X.1 Labour Supply Consider individual’s role as a supplier of factor services Individual sell his labour to firms in return for a wage. Individual makes a choice between income and leisure given the dual constraints of time and the wage
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M L 0 M max T M 0 w Figure 1: Budget Constraint
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M L 0 I 0 I 1 I 2 Figure 2: Preferences
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M L 0 E 0 M max A M 0 w L 1 T M 1 I 1 Figure 3: Labour Market Equilibrium Y 1 = M 0 + w ( T L 1 ) M max = M 0 + wT
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M L 0 E 1 A M 0 L 1 L 2 T M 1 B M 2 E 2 I 2 I 1 Figure 4: Increase in Unearned Income
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M L 0 E 1 T L 2 L 1 E 2 I 1 I 2 Figure 5: Increase in Wage Rate
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M L 0 E 1 T L 3 L 2 L 1 E 2 I 1 I 2 Figure 5: Increase in Wage Rate E 3
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II. Labour Supply Note that the income and substitution effects work against one another Because leisure is a normal good, the income effect from the increase in wage increases the
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This note was uploaded on 07/16/2010 for the course ECON 21 taught by Professor Johng.sessions during the Summer '09 term at Dartmouth.

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Consumer Theory 5 - Economics 21 Intermediate...

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