Principles of Economics- Mankiw (5th) 467

Principles of Economics- Mankiw (5th) 467 - NCREASE IN THE...

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CHAPTER 21 THE THEORY OF CONSUMER CHOICE 481 price: At the higher wage, Sally gets more consumption for every hour of leisure that she gives up. Sally’s preferences, as represented by her indifference curves, determine the resulting responses of consumption and leisure to the higher wage. In both panels, Hours of Leisure 0 Consumption (a) For a person with these preferences . . . Hours of Labor Supplied 0 Wage . . . the labor supply curve slopes upward. Hours of Leisure 0 Consumption (b) For a person with these preferences . . . Hours of Labor Supplied 0 Wage . . . the labor supply curve slopes backward. I 1 2 BC 2 1 1 2 2 1 1. When the wage rises . . . 2. . . . hours of leisure increase . . . 3. . . . and hours of labor decrease. 2. . . . hours of leisure decrease . . . 3. . . . and hours of labor increase. 1. When the wage rises . . . Labor supply Labor supply Figure 21-14 A N I
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Unformatted text preview: NCREASE IN THE W AGE . The two panels of this figure show how a person might respond to an increase in the wage. The graphs on the left show the consumers initial budget constraint BC 1 and new budget constraint BC 2 , as well as the consumers optimal choices over consumption and leisure. The graphs on the right show the resulting labor supply curve. Because hours worked equal total hours available minus hours of leisure, any change in leisure implies an opposite change in the quantity of labor supplied. In panel (a), when the wage rises, consumption rises and leisure falls, resulting in a labor supply curve that slopes upward. In panel (b), when the wage rises, both consumption and leisure rise, resulting in a labor supply curve that slopes backward....
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