Labor Suppl1 - Figure Consumption/Leisure Budget Constraint...

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Labor Supply Recall that when buyers in a goods and services market are making decisions, we can model their decision-making behavior through a combination of their indifference curves and their budget constraints. Since the decision to work or not to work is made in a similar fashion, we can do the same thing for labor supply. Workers will try and maximize their utility based on their preferences between having free time and having money, and on their budget constraint (how much of each good: leisure or all other goods, that they can afford). How do we represent a budget constraint for leisure and all other goods (AOG)? Typically, leisure is measured in one hour units, so that in one day, a worker can choose to take up to 24 hours of leisure. All other goods (AOG) are measured by their dollar value, so that a worker can choose to work 24 hours a day and buy up to 24 hours times the wage (24 w ) worth of all other goods. Graphically, a budget constraint would look like this:
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Unformatted text preview: Figure %: Consumption/Leisure Budget Constraint The indifference curves between leisure and all other goods would be similar to those we have seen in the goods and services market. We can combine a worker's budget constraint with his indifference curves to see how the worker would optimize the labor-leisure choice: Figure %: Optimizing the Consumption/Leisure Decision Just as a buyer's budget constraint pivots with a change in the price of one good, a worker's budget constraint can pivot with a change in the wage. If the wage increases, the curve pivots outwards (U3). If the wage drops, then the curve pivots inwards (U1). Note that the maximum leisure point is fixed, since there are only 24 hours in a day. In the graph below, you can see the inwards pivot that occurs when the wage level drops: workers cannot afford as many other goods as they could prior to the drop in pay....
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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Labor Suppl1 - Figure Consumption/Leisure Budget Constraint...

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