EC 201 11-5-08 - o If non-labor income opportunity cost of...

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EC 201 11-5-08 Factor Demand (e.g., Labor Demand) o For competitive firm, optimal {factor input} choice; MRP= price of input o Labor: MRP=wage o Firm’s D curve for labor is MRP curve o Mkt. D curve is sum of firm D curves Supply of Labor: consumer/worker makes choice: o work more: benefit= more income buy stuff o cost=give up leisure production poss. Frontier for income/leisure choice o choice reflects individuals preferences towards leisure and income non-labor income: gifts, inheritances, lottery, social security, pensions, dividends, interest o non-labor income more leisure (less work) o leisure is a normal good What if wage changes? o Similarity between non-labor income + wage: change not available before “richer” o Difference: non-labor income – parallel shift – wage – rotation o Wage is opportunity cost of leisure
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Unformatted text preview: o If non-labor income, opportunity cost of leisure o If wage , leisure “more expensive” ↑ • If wage , 2 effects; ↑ o 1. Income effect (similar to non-labor income) more leisure (work less) o 2. Substitution effect- leisure expensive – less leisure (more work) o 3. Net effect= income effect+ substitution effect • If wage ↓ o 1. Inc. effect: work more o 2. Subst. effect: leisure cheaper: more leisure (work less) o 3. Net effect= income effect + substitution effect • Net effect of wage ↑: o More work? o Less work? o Work same? o Men aged 25-55: income effect + substitution effect are about the same size o w↓ > work full time • Labor supply curve o Labor- supply elast. = % ∆Ls/ % ∆wage o “backward-bending labor supply curve” o Elast. <0 o Inc. effect> subst. eff....
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This note was uploaded on 04/19/2011 for the course EC 201 taught by Professor Ballard during the Fall '08 term at University of Michigan.

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EC 201 11-5-08 - o If non-labor income opportunity cost of...

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