pubsec-inc_substnotes

# pubsec-inc_substnotes - B RANDEIS U NIVERSITY D epartment o...

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BRANDEIS UNIVERSITY Department of Economics Economics 134 Mr. Coiner Public Sector Spring, 2010 Notes on Income and Substitution Effects The Choice of how many hours to work We represent this choice in a diagram that has Hours of Leisure on the x-axis and \$ to spend on goods on the y-axis. The indifference curves between Leisure and \$ will have the usual shape, because both \$ and leisure are "good" things that a person would like to have more of. To find the budget line, we need to know how much non-labor income the person has (how much income she would have even if she works zero hours), and we need to know her hourly wage. Ifshe has \$1000 in non-labor income and an hourly wage of \$20 per hour, her budget line looks like the one below: g ~I(:>OD ~ -- ~ A !--------------~--- Lel;v~ \-{"vd. 1.0(>:> One option she has is to work zero hours, enjoy the maximum 2000 hours of leisure, and have \$1000 to spend on goods. Call this point A. Starting from A, she can move northwest by beginning to work, giving up leisure but earning extra income. The slope of the line is how many \$ she gets for each hour of leisure she gives up, and this is simply

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## This note was uploaded on 10/15/2011 for the course ECON 134 taught by Professor Coiner during the Spring '11 term at Brandeis.

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pubsec-inc_substnotes - B RANDEIS U NIVERSITY D epartment o...

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