L10 - Consumption and Leisure

Question 1

What does a budget constraint between leisure and income look like?

Answer 1

If an individual has L hours of leisure, then they work T –L hours

(DIAGRAM IN NOTES)

Question 2

How does a worker find their optimal choice for leisure/income?

Answer 2

Combine Indifference Curves and Budget Constraint

DIAGRAM IN NOTES

Question 3

What happens if there is an increase in wages?

Answer 3

The individual will sacrifice more leisure for work.

DIAGRAM IN NOTES

Question 4

How can you derive the relationship between wages and labour supply?

Answer 4

SEE DIAGRAM IN NOTES

-For normal

-And Backward bending
(Sometimes at high wages, people actually supply less labour as wages increase)

Question 5

What does the graph look like following a wage increase? (Income and Substitution)

Answer 5

CHECK DIAGRAM ON NOTES

Question 6

What occurs to the budget constraint if there are income tax rates?

Answer 6

The slope of the budget constraint changes as people will work less to avoid paying more tax.

(CHECK DIAGRAM ON NOTES)

Question 7

What happens if the tax threshold is a lot higher?

Answer 7

The Budget constraint will alter to avoid working over the high tax threshold and so people may work less.

(CHECK/DRAW DIAGRAM ON NOTES)

Question 8

What happens to leisure and work if there is the implementation of unemployment benefits?

Answer 8

Without such benefits, the individual
earns Y* and works T – L* hours

With benefits, the individual may choose to
work 0 hours. If so, the individual earns less
income (Y < Y*) but gets higher utility (U2 > U1)

(CHECK DIAGRAM ON NOTES)