Lecture 3 Labor Supply 2 post

Lecture 3 Labor Supply 2 post - LECTURE 3 LABOR SUPPLY 2...

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LECTURE 3 LABOR SUPPLY 2 Introduction to Labor Economics Economics 440 Prof. Brown
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OUTLINE Model of Labor Leisure Choice Income and Substitution Effects Participation decision Labor Supply Labor Supply Elasticity Application: Taxes
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LABOR-LEISURE CHOICE Choose the utility maximizing bundle of CONSUMPTION and LEISURE Consumption and leisure are linked through the labor market: work earn $ buy C
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FOCUS: TRADEOFF BETWEEN CONSUMPTION AND LEISURE Two important considerations: 1. Preferences – Represented by utility function ࢛ൌࢁሺ࡯ ,ࡸሻ 2. Choice set – Represented by the budget constraint ࡯ൌ࢝ࢎ൅ࢂ Where ࢎൌࢀെࡸ and ࢂ ൌ ࢔࢕࢔࢒ࢇ࢈࢕࢘ ࢏࢔ࢉ࢕࢓ࢋ
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EXAMPLE Individual’s preferences over C and L: ࢛ൌ ࡯െ૚૙૙ ࡸെૡ૝ Time endowment = 168 hrs/wk, Wage = $10/hr Step 1: What does the budget constraint look like? Step 2: Find the bundle that maximizes utility. A. Condition 1: MRS = w B. Condition 2: It must be affordable
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EXAMPLE Individual’s preferences over C and L: ࢛ൌ ࡯െ૚૙૙ ࡸെૡ૝ Time endowment = 168 hrs/wk, Wage = $10/hr L C 168 1680 -10 Slope of BC ൌെݓ Slope of IC ൌെܯܴܵൌ ିெ௎ ெ௎ 127 470
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INCOME AND SUBSTITUTION EFFECTS L C U 0 L* C* h*
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THE EFFECT OF A CHANGE IN NONLABOR INCOME ON HOURS OF WORK L C U 0 An increase in nonlabor income leads to a parallel upward shift in the budget line. If leisure is a normal good work hours will fall. This is the INCOME EFFECT. U 1
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THE EFFECT OF A CHANGE IN WAGE ON HOURS OF WORK L C U 0 L* C* h*
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THE EFFECT OF A CHANGE IN WAGE ON HOURS OF WORK L C U 0 C* U 1 An increase in wage leads to an outward rotation of the budget line. Income increases at any h (except 0) Price of leisure also increases The effect on hours of work is ambiguous.
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Lecture 3 Labor Supply 2 post - LECTURE 3 LABOR SUPPLY 2...

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