Therefore the substitution effect of the real wage increase is for consumption

Therefore the substitution effect of the real wage

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(consumption). Therefore, the substitution effect of the real wage increase is for consumption to increase and for leisure to decrease, and so the substitution effect is for labour supply, N s = h = l, to increase. Now, the movement from O to H is then the pure income effect , as the real wage stays the same as the budget constraint shifts out from JKD to EBD, and non-wage income increases. Because both goods are normal goods, consumption increases and leisure increases and moves from O to H. Thus, when the real wage increases, the consumer can consume more consumption goods and more leisure, because the budget constraint has shifted outwards. Consumption must then increase because the substitution and income effects both act to increase consumption. However, there are opposing income and substitution effect on leisure, therefore it is ultimately unclear whether leisure rises or falls. Therefore and increase in the real wage rate could lead to an increase or decrease in labour supply, N s . An increase in the real wage rate creates both an income and a substitution effect. An increase in the real wage rate shifts the budget constraint from ABD to EBD. The kink in the constraint remains fixed, and the budget constraint becomes steeper. Consumption must increase, but leisure may rise or fall, because of the opposing substitution and income effects. The substitution effect is the movement from F to O, the income effect is the movement from O to H. Labour Supply Curve The labour supply curve tells us how much labour the consumer wishes to supply for each possible value for the real wage. Here, the labour supply curve is upwards-sloping, which implies that the substitution effect of an increase in the real wage is larger than the income effect for the consumer. The higher the real wage rate, the higher the rate of unemployment as more people will be willing to work for a higher wage rate.
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Effects of an Increase in Dividend Income or a Decrease in Taxes The labour supply curves shifts to the left when dividend income increases or taxes fall, as a result of a positive income effect of leisure for the consumer. An increase in wage rate means that you will be earning more than you did at a specific point. Therefore individuals believe that they can work less for the same pay. As a result employment decreases and the curve shifts to the left. Perfect Complements When consumption and leisure are perfect complements for the consumer, indifference curves are L-shaped with right angles along the line C = al, where a is a constant. The budget constraint is ABD, and the optimal consumption bundle is always on the line C = al. The Representative Firm
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Consumers and firms come together to exchange labour for consumption goods. While the representative consumer supplies labour and demands consumption goods, we turn to the behaviour of the firms, which demand labour and supply consumption goods. The choices of the firms are determined by the available technology and by profit maximisation. We will ultimately focus on the choices of a single, representative firm. The firms in this economy
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