Chapter 3 Part 2

Chapter 3 Part 2 - Supply of Labor The supply of labor is...

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Supply of Labor The supply of labor is determined by individuals. Individuals of working age must decide how to allocate their time: work : to earn an income leisure : activities other than work In deciding how much to work, an individual should weigh the benefits against the costs of working.
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Example Jack is a UCR student and he is now planning for his summer break. Two uses of his time: Work in Starbucks, make some money so that he can buy the things he likes. Hang out with his friends (of course he won’t get paid for this). Jack’s “happiness” is increasing in the quantity of things that he can buy ( consumption ) the amount of time he can spend with his friends ( leisure )
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Example Benefits of working: Income that can be used to buy things ( consumption ). Costs of working: Fewer time for leisure . Jack’s objective is to maximize his happiness. 2 things needed to be specified: Jack’s preferences His budget
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Preferences Consumption Leisure (Hours per day) 24 0
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Preferences Consumption Leisure (Hours per day) 24 0 19 14 5 A
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Preferences Consumption Leisure (Hours per day) 24 0 19 14 5 8 A B
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Preferences Consumption Leisure (Hours per day) 24 0 19 14 5 8 11 14 9 4
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Preferences Consumption Leisure (Hours per day) 24 0 19 14 Indifference curve 5 8 11 14 9 4
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Explanations Let’s pick a reference point, say point A . Point A is one of the many options (or consumption bundles ) that Jack can pick. At point A, Jack will have 5 units of consumption and work for 5 hrs a day (19 hrs of leisure). What are the alternatives ? Suppose now Jack is thinking of working 10 hrs a day (14 hrs of leisure). Since Jack would have fewer time for leisure, he will be less happy unless he is compensated by more consumption. Suppose Jack is indifferent between point A and point B. At point B, Jack will have 8 units of consumption and work for 10 hrs a day.
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Explanations What do we mean by indifferent ? Jack would definitely prefer point A if his consumption is less than 8 units. He is more than willing to work for 10 hrs a day if his consumption is more than 8 units. Both A and B would give Jack the same level of happiness. Jack is said to be indifferent between point A and point B. By repeating the same logic, we can identify all the other points that give the same level of happiness as A and B. When we connect all these points together, we get an indifference curve .
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An indifference curve connects a set of points among which the consumer is indifferent. In other words, any point on
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Chapter 3 Part 2 - Supply of Labor The supply of labor is...

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