1-24-08Slides - The Demand for Leisure A The Determinants...

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The Demand for Leisure A. The Determinants of Demand 1. The opportunity cost of the good. 2. One’s level of wealth. 3. One’s set of preferences. D = f ( C, W) D = demand C = opportunity cost (-) W = wealth (+) The opportunity cost of leisure is the wage rate. =f is determined by preferences D = f (W, Y) D = demand for leisure W = wages (-) Y = income (+)
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A Graphic Analysis of the Optimization Problem Assumptions: Individuals derive utility from the consumption of commodities that are produced using combinations of market goods and non-market goods All income earned in the market is spent on market goods All non-market time is spent in the production of commodities Individual level Goal: Select the utility maximizing combination of market goods (bought with wages) and non-market time .
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0 16 16 Non-market Time 0 Market Time A B C Market Goods The Budget Constraint Vertical Segment BA: Non-labor income Segment BC: Negatively sloped (trade-off between market and non-market time) Slope of segment BC is the wage rate
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Indifference Curves Market Goods 0 16 16 0 U 1 A B C Marginal Rate of Substitution: MRS
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Characteristics of Indifference Curves More is preferred to less. Indifference curves do not intersect. Indifference curves are negatively sloped There are an infinite number of indifference curves in the graph space.
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