Chapter-2 - LECTURE-2: WORK EFFORT PRODUCTION AND...

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LECTURE-2: WORK EFFORT PRODUCTION AND CONSUMPTION - We begin discussing the individual choice problem regarding working time and leisure. - Quantity of output produced can be written as a function of labor input l. ) ( t t l f y = - The function f can be referred to as households’ production function which specifies the characteristics of the production process. - The extra output produced by an additional unit of worker is called the Marginal Product of Labor (MPL). We assume that MPL diminishes as the labor input increases. (Diminishing Marginal Productivity) - Slope of the tangent lines decreases as the employment level increases. y f(l) l
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- MPL schedule is nothing but the slope of the production function at different levels of labor input - An increase in the overall productivity of labor will shift the production function up. - For each level of labor input, more output will be produced. Q: What will be the effect of a productivity improvement on MPL? MPL l y f(l) l f’(l)
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- For simplicity, assume that households do not have the opportunity to exchange goods with other households. In this case, the decision regarding the amount of work is a decision about how much to consume since consumption is restricted to one’s own production, that is: ) ( t t t l f y c = = PREFERENCES - Household has to make a decision regarding how much to work and how much to
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Chapter-2 - LECTURE-2: WORK EFFORT PRODUCTION AND...

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