Chapter 9- Buying And Selling

Question 1

Gross demands

Answer 1

The amount of a good the consumer actually ends up consuming: how
Much of each of the goods he or she takes home from the market.

Typically positive numbers

Question 2

Net Demand

Answer 2

The difference between what the consumer ends up with (gross demand) and the initial endowment of the goods. The net demand of a good is simply how much was bought or sold.

If we let (x1, x2) be the gross demand, then (x1-ω1, x2-ω2) are the net demands.

May be negative or positive numbers (a negative demand is simply an amount supplied to the market)

Question 3

Labor budget constraint

Answer 3

Y=Yn+wLa=Yn+w(T-Le)

La= hours of labor per week
Le=hours of leisure per week
T=La+Le, Total hours per week
Y=Disposable income ($/week)
Yn=Non wage income ($/week)
W=wage rate ($/hour)

Question 4

Real wage

Answer 4

The value of the extra consumption to a consumer from working a little more has to be just equal to the extra consumption to the consumer that it takes to generate that consumption .

The amount of consumption that the consumer can purchase if she gives up an hour of leisure.

Question 5

Endowment point (labor)

Answer 5

(Le, Yn) kink point, what the consumer would get if they did not engage in the market trade at all. (Did not work)

Question 6

Potential income constraint

Answer 6

Y+wLe=Yn+wT ➡️ Y=(Yn+wT)-wLe

Individuals get to attain the highest possible IDC. However, they are constrained by the potential income constraint.

Illustrates various amounts of income that can be obtained by giving up leisure and working at the market wage.

The “actual” amount of income receives depends on the hours you decide to work at the market wage plus your non-wage income

Question 7

MRS (Labor)

Answer 7

MRS=MULe/MUY,

tangency condition @ (Le, Y)MRS=-w

If we take away a unit of leisure how much disposable income do you have to give me to make me just as happy as before.

The more I woke the more money you have to pay me to get me to work an hour more

Question 8

Budget condition formula

Answer 8

wLe+Y=Yn+wT

Question 9

Labor tangency condition

Answer 9

At (Le, Y):MRS=-w

Question 10

Elasticity of labor supply

Answer 10

Labor supply elasticity measures a workers responsiveness to wage changes.

It measure the change in hours of work in response to w wage change

E, La,w= (ρLa/ρw) w/La*

The partial derivative of La* with respect to w, multiplied by w, divided by La*

Question 11

IE and SE if wage change wages

Answer 11

What happens to the equilibrium amount of work effort if wage rises?

You might work more because the rutile to work effort is higher. (I.e you might SUBSTITUTE away meshes beaches the opportunity cost of leisure is higher.)

You might work less cease your father income is met faster. This sincerely the INCOME effect. (With more in come you can afford to buy more leisure (assuming leisure is a normal good))

Income and substitution effect work in opposite directions

at low wages SE>IE,
At high wages IE>SE
Results in backward bending labor supply

Question 12

Wages and IE/ SE

Answer 12

at low wages SE>IE,
At high wages IR>SE
Results in backward bending labor

Question 13

Reservation wage

Answer 13

The wage at which an individual is indifferent between participating and not participating in the labor market

When MRS>W at T, you will not participate in the labor market because the implicit value of money-market time is high relative to the explicit market value of non-market time. I

Question 14

Endowment

Answer 14

Denoted (ω1,ω2). Is the amount of the two goods the consumer has before he enter this market.