2. Labour Supply

Question 1

Marginal utility of leisure

Answer 1

The amount utility increases by when leisure is increased by one unit

Question 2

Marginal utility of consumption

Answer 2

The amount utility is increased by when consumption is increased by one unit

Question 3

MRS

Answer 3

Marginal rate of substitution. It is the slope of the utility function

Question 4

What does the convexity of the utility function imply?

Answer 4

Diminishing MRS

Question 5

Equation for budget constraint

Answer 5

C= wT+ V-wL

Question 6

At the equilibrium for budget constraint and the utility function what is true?

Answer 6

MRS=w. The rate at which a person is willing to give up leisure for consumption is equal to the wage

Question 7

How does an increase in non- labour wage affect leisure?

Answer 7

It typically increases leisure if we assume leisure is a normal good

Question 8

After an increase in wage, when will someone work less and consume more leisure?

Answer 8

When their income effect >substitution effect

Question 9

After an increase in wages when will someone work more and consume less leisure?

Answer 9

When their income effect < substitution effect

Question 10

If we have a corner solution and MRS>W what happens?

Answer 10

The person doesn’t work at all

Question 11

If we have a corner solution and MRS

Answer 11

They will work

Question 12

Describe a typical individual’s labour supply curve

Answer 12

As wage increases, so does hours worked until a point where hours worked begins to decrease

Question 13

Elasticity of labour supply equation

Answer 13

Ó= (Change in h)/(Change in W) x W/h

Question 14

When is labour supply upward sloping?

Answer 14

When substitution effect>income effect

Question 15

When is labour supply curve downward sloping?

Answer 15

When income effect> substitution effect

Question 16

If the elasticity of labour supply is zero what does the LS curve look like?

Answer 16

It is vertical since it is perfectly inelastic

Question 17

Intertemporal substitution hypothesis (ISH)

Answer 17

People substitute their time over their life cycle to take advantage of changes in price of leisure

Question 18

What is the usual estimate of the elasticity of labour supply for men and women?

Answer 18

• -0.1 in men

* thought to be positive for women

Question 19

Why is it hard to estimate the elasticity of labour supply?

Answer 19

• the wage isn’t exogenous
• what period should hours be measured over?
• measurement error in survey data
• division bias
• average vs marginal wages
• missing data and selection bias

Question 20

What is a good example of a natural experiment for elasticity of labour supply?

Answer 20

Taxi drivers in New York

Question 21

What is the correlation between unemployment and labour supply? Why might this happen?

Answer 21

They are negatively correlated. Could be because of discouraged worker effect

Question 22

What effect does the welfare programme have?

Answer 22

• it has a disincentive effect
• it raises the reservation wage
• it lowers the net wage

Question 23

How does the welfare programme affect the low paid?

Answer 23

• they face higher marginal tax rates, which can be made higher by the reduction in benefits in kind
• reduction in their real wages

Question 24

What is an alternative to the welfare programme?

Answer 24

In work benefits or earned income tax credits

Question 25

How can we evaluate benefit reforms?

Answer 25

1. Randomised social experiments
2. Before and after comparisons
3. Using control and treatment groups
4. Difference- in- differences (combining 2 and 3)