Consumption Flashcards
Budget constraint
C = wh - wl + π -T
Why does the graph cut vertically down towards h on the leisure axis?
Because there is a fixed amount of free time. When dividend income is greater than taxes
Slope of the budget line
Real wage
Slope of the IC
Marginal rate of substitution
Point of optimal consumption
MRS = W
Three characteristics of the IC
MRS
convex
downward sloping
Two determinants on wage income
Taxes
Dividend income
What shifts up the budget constraint?
Decrease in taxes
Increase in dividend income
Substitution effect if increase in wage
Price of leisure rises so consumer substitutes in more consumption
Income effect if increase in wage
Both increase as the HH is more wealthy
An increase in wages therefore leads to
An increase in the supply of labour because it entices other people to join
Increase in dividend income or decrease in taxes
Shifts Labour supply left
Decrease in dividend income or increase in taxes
Shifts Labour supply right
One period model: are labour and capital fixed or variable?
Fixed capital, variable labour
Determinants to increase MPL
Increase in capital stock
Increase in productivity
When to hire labour till?
When MPL = Real wage = MPN
MPL and MPK are increasing or decreasing functions
Decreasing functions, they become less efficient
Adding capital or increasing productivity does what to labour demand?
Shifts the curve right
Why do you consume less leisure as wages rise
Because the SE > IE
Slope of the PPF
MRT - marginal rate of transformation
Three preference properties of the representative consumer
Monotonicity
Diversity is preferred
Consumption and leisure are normal goods
What does a consumer demand and supply
Demands consumption
Supplies Labour
What does a producer demand and supply
Demands labour
Supplies consumption
Choices of firms are made by two things
Technology
Profit maximisation
Increase in π-T
Shifts up the budget constraint
Increase in real wage
Increases the slope of the budget line
