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2010_lecture_7

# 2010_lecture_7 - Economics 101Lecture 7 Labor Supply and...

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Economics 101—Lecture 7 Labor Supply and Consumer Surplus George J. Mailath February 3, 2011

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In our last episode 1 The expenditure function e ( p , u ) gives the smallest level of income needed to achieve a level of utility u , given prices p . The associated compensated demands are x c ( p , u ) , so that e ( p , u ) = i p i x c i ( p , u ) . The uncompensated demands are also called Marshallian demands , and the compensated are also called Hicksian demands . 2 Shephard’s Lemma : e ( p , u ) / p i = x c i ( p , u ) . 3 The Slutsky equation : x i ( p , I ) p i = x c i ( p , V ( p , I )) p i The Substitution Effect x i ( p , I ) I x c i ( p , V ( p , I )) The Income Effect .
The picture

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Another picture i is a normal good x i / I > 0 x i / p i < x c i / p i < 0 .
Another picture i is a normal good x i / I > 0 x i / p i < x c i / p i < 0 . i is an inferior good x i / I < 0 x i / p i > x c i / p i .

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Labor supply Individual chooses consumption, c , labor, , and leisure, h , to maximize utility U ( c , h ) subject to two constraints: + h = T , where T is the total amount of time available, and c = w + n , where n is non-labor income.
Labor supply Individual chooses consumption, c , labor, , and leisure, h , to maximize utility U ( c , h ) subject to two constraints: + h = T , where T is the total amount of time available, and c = w + n , where n is non-labor income.

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2010_lecture_7 - Economics 101Lecture 7 Labor Supply and...

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