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Principles of Economics- Mankiw (5th) 466

Principles of Economics- Mankiw (5th) 466 - 480 PA R T S E...

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480 PART SEVEN ADVANCED TOPIC HOW DO WAGES AFFECT LABOR SUPPLY? So far we have used the theory of consumer choice to analyze how a person de- cides how to allocate his income between two goods. We can use the same theory to analyze how a person decides to allocate his time between work and leisure. Consider the decision facing Sally, a freelance software designer. Sally is awake for 100 hours per week. She spends some of this time enjoying leisure—rid- ing her bike, watching television, studying economics, and so on. She spends the rest of this time at her computer developing software. For every hour she spends developing software, she earns $50, which she spends on consumption goods. Thus, her wage ($50) reflects the tradeoff Sally faces between leisure and con- sumption. For every hour of leisure she gives up, she works one more hour and gets $50 of consumption. Figure 21-13 shows Sally’s budget constraint. If she spends all 100 hours en- joying leisure, she has no consumption. If she spends all 100 hours working, she
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