2b. Labor supply curves

Question 1

What is the definition of “leisure”?

Answer 1

all time spent not working.

Question 2

What is the equation for number of hours worked per day (H)?

Answer 2

The number of hours worked per day, H, equals the total number of hours available in day T, say T=24, minus the hours of leisure or non-work, N, in a day:

H = 24 − N

Question 3

What is the denotation of total income?

Answer 3

Y = wH

w = wage rate
H = hours worked per day

Question 4

What is the equation for total income?

Answer 4

Her total income, Y, is her earned income plus her unearned income, if any, denoted by Y*

Y = wH + Y*

Question 5

How is the demand for leisure shown on a graph?

Answer 5

Question 6

What happens if wage rate increases? How is this shown on a graph?

Answer 6

• Slope of L2 is steeper (as wage rate is greater)
• still slopes until 24h, as that is the time constraint

The graph shows how the demand for leisure is LOWER (higher wage == greater work hours, as each hour of leisure also COSTS more)

Question 7

What does the work supply curve look like? And how does it relate to the leisure demand curve?

Answer 7

Consumers demand for leisure is downward sloping.

As there is a time constraint, 24 hours, the supply of work hours MUST be UPWARD sloping.

-> eg. E2, higher wage, lower demand for leisure, so obviously greater supply of work hours

Question 8

What are the two potential scenarios that happen when a wage increases?

Answer 8

When wage increases. Two scenarios:

1. Leisure is an Inferior good: demand for leisure decreases due to the Substitution Effect AND decreases because of the Income Effect.
   Certainly work more if wage goes up!
2. Leisure is a Normal good: demand for leisure decreases due to the Substitution Effect BUT demand for leisure increases for the Income Effect. Work more or less?
   Work more if |SE|>|IE|
   Work less if |SE|<|IE|.

Question 9

What does a DIG look like if the wage increases and leisure is a normal good (but SE > IE)?

Answer 9

–> in this example substitution effect is greater than the income effect, so the individual works more as the wage goes up

Question 10

What does a DIG look like if the wage increases and leisure is a normal good (but SE < IE)?

Answer 10

–> in this example substitution effect is smaller than the income effect, so the individual works less as the wage goes up

Question 11

What does a DIG look like if the wage increases but leisure is an inferior good?

Answer 11

–> in this example the income effect is negative (as leisure is an inferior good), and hence the individual works more if the wage goes up

Question 12

What happens to the “labor supply curve” as the income increases significantly?

Answer 12

The supply of labor will first go up, before decreasing as the consumer will be at a stage where their wage is so high that it meets almost all their needs and thus they value leisure more…