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380 Labor Supply

380 Labor Supply - is substituted for leisure Thus leisure...

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Notes Consumer Theory-labor supply Consumers have utility over leisure, L and goods x, U(L,x). The budget constraint is comprised of two parts w L +K p x x where K is capital income, w is the wage rate, and 24 L L = - where L is labor worked or supplied. The budget constraint in terms of L is w(24-L)+k= p x x or p x x+w L 24 k w ≤ + =I. The budget constraint has slope -w/p x so it is the real wage rate that matters or x=I/p x -(w/p x )L. Set up the problem graphically with x on the dependent axis and L on the horizontal axis. Solution where MRS (leisure for x)=w/p x =real wage. Graphically do income and substitution effects. Note if L is normal and w increases, it moves in the direction of working less or taking more leisure. The substitution effect of a wage increases means that x
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Unformatted text preview: is substituted for leisure. Thus leisure behaves like any other consumption good. Labor does not however, the substitution effect says as w increases , people work more (consume less leisure and more x) but the income effect with leisure normal is to work less so these two terms pull in opposite directions when leisure is normal. The expenditure problem is: min x,L k=E=p x x-w(24-L) subject to U(x,L)= U Slutsky Equation: * * * ( , , ) ( , , ( , , )) c x x x c L w p U L w p E p w U L L L E w w E w = ∂ ∂ ∂ ∂ = + ∂ ∂ ∂ ∂ Noting that E L w ∂ = -∂ * * c L L L L w w I ∂ ∂ ∂ = + ∂ ∂ ∂ total effect=substitution effect +income effect negative+positive if leisure is normal...
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