lecture 8 - labour leisure choice

Question 1

how does the budget constraint change when it is wealth considered and not income?

Answer 1

suppose a consumer has some initial endowment of both goods (x1o,x2o) and some cash/liquiod assets m then M = m + p1x1o +p2x2o

Question 2

what is the budget line equation when wealth is considered rather than income?

Answer 2

p1x1+ p2x2 = m +p1x1o + p2x2o

Question 3

what is the fruit growers problem?

Answer 3

suppose a fruit grower grows both apples and oranges, and also consumes both but he has no cash so his wealth is equal to the value of the stock of apples and oranges, if the price of apples increases does the fruit grower consume more or less apples

Question 4

what is the total change in demadnd formula when wealth is introduced?

Answer 4

total change in depend is equal to change due to substitution effect + change due to ordinary income effect + change due to endowment income effect

Question 5

what is the final modified slutsky equation?

Answer 5

dx1/dp1 = dx1h/dp1 + [dx1/dM](x1o-x1)

Question 6

for the modified slutsky equation when is the good a normal good?

Answer 6

the sign is negative if the consumer is a net buyer , the sign is ambigous if the consumer is a net seller

Question 7

for the modified slutsky equation when is the good and inferior good?

Answer 7

the sign is ambigous if the consumer is a net buyer but the sign is negative if the consumer is a net seller

Question 8

explain the simple model for the labour supply decision?

Answer 8

the consumer has T hours in a day out of which he can spend L hours to work and the remaining T-L to leisure z. he consumes food c and leisure z, the hourly wage is w and price of c is p. the consumer also has a non labour income of m. hourly wage lost for taking leisure is the price of leisure

Question 9

what is the value of the consumption expenditure for the simple labour supply decision model?

Answer 9

cp where c is food and p is price of food

Question 10

what is the income for the simple labour supply decision model?

Answer 10

M= m + Lw = m +w(T-z) where M is income , m is the non labour income and L is labour hours and w is hourly wage

Question 11

what is the budget line for the simple labour supply decision model?

Answer 11

c= (m +wT)/p - (wz)/p

Question 12

what are the two possibilities for labour supply curve?

Answer 12

the labour supply curve could be upwards sloping as the individual works more and consumes more or the labour supply curve could be backwards bending as from some point the individual works less while increases his consumption only a bit

Question 13

is leisure a giffen good?

Answer 13

no it is not, we normally consume leisure less than maximum hours availiable so we are a net seller. therefore the effect of a wage rise on leisure demand will be ambigous if leisure is a normal good and negative if leisure is an inferior good,

Question 14

what would the slope of the labour supply curve be if the leisure is an inferior good?

Answer 14

the slope will be postively sloped

Question 15

what is the substitution effect for wage increases?

Answer 15

when the wage increases, consumers will consume less leisure and work more

Question 16

what is the income effect when there is an increase in the wage rate?

Answer 16

when the wage increases, the value of endowment( value of availiable work time T) increases. this is just like extra inocme which can be spent to consume extra leisure

Question 17

when the leisure is an inferior good, what is the substitution and income effect and therefore the resultant relationship between labour and wage?

Answer 17

when the leisure is an inferior good, the income and substitution effect work in the same direction so hence wage and labour will be positively linked.

Question 18

when the leisure is an normal good, what is the substitution and income effect and therefore the resultant relationship between labour and wage?

Answer 18

Normal good: the substitution and the income effect work in opposite directions, and hence ambiguity:
If the wage rate is small ⇒ the substitution effect is larger than the income effect ⇒ labour supply increases;
If the wage rate is high ⇒ the income effect outweighs the substitution effect ⇒ labour supply decreases;

Question 19

what occurs when you include non wage income into the simple labour supply decision model?

Answer 19

consumers assured minimum consumption will increase with the likely effect being more consumption of leisure

Question 20

what occurs when there is unemployment benefit in the simple labour supply decision model?

Answer 20

suppose the consumer gets benefit B if he does not work at all, if he works any positive amount of time then he loses the benefit, for low wage w, the consumer prefers to take the benefit, if the wage increases substantially to w’ then the consumer prefers to work