laborsupply.9

# Laborsupply.9 - Econ 100A Labor Supply(Chapter 9 Thomas G Koch Fall 2008 Thomas G Koch Labor Supply(9 1(42 Clickers Turn on your clicker Hit a

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Econ 100A: Labor Supply (Chapter 9) Thomas G. Koch Fall 2008 Thomas G. Koch Labor Supply (9) 1(42)

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Clickers Turn on your clicker Hit a button Thomas G. Koch Labor Supply (9) 2(42)
Utility Maximization with Quasilinear Preferences max u ( x 1 , x 2 ) = ln( x 1 ) + x 2 subject to m p 1 · x 1 + p 2 · x 2 Thomas G. Koch Labor Supply (9) 3(42)

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If an interior solution MRS = - p 1 p 2 - MU 1 MU 2 = - p 1 p 2 If x 1 , x 2 > 0 1 x * 1 1 = p 1 p 2 x * 1 = p 2 p 1 Thomas G. Koch Labor Supply (9) 4(42)
How much of good two? m = p 1 · x * 1 + p 2 · x * 2 m = p 1 p 2 p 1 + p 2 · x * 2 If an interior solution x * 2 = m - p 2 p 2 Thomas G. Koch Labor Supply (9) 5(42)

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What if m < p 2 By equation x * 2 < 0 AGAINST THE RULES!!!!! So if m < p 2 then x * 2 = 0 and x 1 = m p 1 Thomas G. Koch Labor Supply (9) 6(42)
Consider two cases First, if m > p 2 I.e., an interior solution Second, if m < p 2 I.e., a boundary solution Thomas G. Koch Labor Supply (9) 7(42)

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If m < p 2 Boundary solution: ( x * 1 , x * 2 ) = ( m p 1 , 0) To aﬀord old bundles at new prices, need m 0 = p 0 1 ( m p 1 ) Thomas G. Koch Labor Supply (9) 8(42)
m still less than p 2 x 1 ( p 0 1 , m 0 ) = m 0 p 0 1 = p 0 1 ( m p 1 ) p 0 1 = m p 1 = x 1 ( p 1 , m ) Thomas G. Koch Labor Supply (9) 9(42)

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If m > p 2 x * 1 = p 2 p 1 (see previous slides) Neither inferior nor normal No income eﬀect Thomas G. Koch Labor Supply (9) 10(42)
Quasilinear—Substitution Eﬀect Only Thomas G. Koch Labor Supply (9) 11(42)

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## This note was uploaded on 09/12/2011 for the course ECON 100A/ 100B taught by Professor Staff during the Fall '08 term at UCSB.

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Laborsupply.9 - Econ 100A Labor Supply(Chapter 9 Thomas G Koch Fall 2008 Thomas G Koch Labor Supply(9 1(42 Clickers Turn on your clicker Hit a

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