Lecture 26 april 8 exam 3

Lecture 26 april 8 exam 3 - Announcements Read chapters...

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Unformatted text preview: Announcements Read chapters 11-13 HW on all 3 due Monday 2 of 40 HOUSEHOLD CHOICE IN INPUT MARKETS THE SUPPLY OF LABOR The relationship between the wage and how much we want to work is represented by the labor supply curve which is a diagram that shows the quantity of labor supplied at different wage rates. Its shape depends on how households react to changes in the wage rate. Like other things weve seen, people will basically try to allocate their time so that the marginal utility of the last unit of time spent on each activity is the same. This maximizes their utility. (MU x /H x =MU y /H y , where H=hour) Working gives utility through paying us $$ but gives us disutility as well (because sometimes it sucks). 3 of 40 HOUSEHOLD CHOICE IN INPUT MARKETS THE SUPPLY OF LABOR INCOME AND SUBSTITUTION EFFECTS OF A WAGE CHANGE As wages rise, we might want to work more since higher pay may mean that the utility gained by working more may now outweigh the disutility. In such as case, we say that the substitution effect dominates (the cost of leisure rises and we substitute from leisure into labor). In this case the labor supply curve slopes up. 4 of 40 HOUSEHOLD CHOICE IN INPUT MARKETS THE SUPPLY OF LABOR INCOME AND SUBSTITUTION EFFECTS OF A WAGE CHANGE However, if the wage becomes high enough, we may actually cut back on labor because now we have more extra $$ and we might want to spend it on leisure activities (leisure is a normal good). With more $$, we can also do more fun stuff with our leisure time (the MU of leisure rises). Here we say that the income effect dominates (we demand more leisure as our income rises) . In this case the labor supply curve actually bends backwards. 5 of 40 HOUSEHOLD CHOICE IN INPUT MARKETS THE SUPPLY OF LABOR When leisure is added to the choice set, the line between input and output market decisions becomes blurred. In fact, households decide simultaneously how much of each good to consume and how much leisure to consume....
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This note was uploaded on 08/15/2011 for the course ECON 2005 taught by Professor Zirkle during the Spring '07 term at Virginia Tech.

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Lecture 26 april 8 exam 3 - Announcements Read chapters...

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