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 2113 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
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '10
 abijian
 Sally

Click to edit the document details