Consumption-Leisure model Flashcards
What does the budget constraint graph model in the consumption-leisure model
Compares income per week with hours of leisure per week
Whats the formula for income per week
Y=w(T-L)
w is the wage rate
T is the total time in the week
L is the number of hours of leisure
What is the optimal choice on the consumption-leisure model graph
When n individual can earn Y* while also working T-L* hours
What happens to the consumption-leisure model graph if there is an increase in wage rate
Will increase the Y intercept thus steepening the gradient as people are more incentivized to work
What are the axis of the labour market graph
Quantity supplied of work (T-L) on the x axis
Wage rate on the Y axis
What trend does the labour market show
As wages increase so does the incentive to work which increases the amount of labour supplied
In special cases, when wages get very high what happens to the labour market
The curve becomes backwards bending as people supply less labour
What does the substitution effect do on a backwards bending labour graph if there is an increase in wages
Opportunity cost of leisure goes up which pushes the optimum choice left
What does the income effect do to the backwards-bending labour supply graph if there is an increase in wages
Pushes if further right than the original after the substitution effect pushes it left
What is the welfare trap
When benefits are too high and an individual may choose to work 0 hours and receive benefits as that will lead to higher utility despite less income
How can the welfare trap be removed
Reducing the level of benefits or removing benefits completely
