microfoundations labour supply

Question 1

what are the key variables of the labour supply model?

Answer 1

time endowment = 1 = L + l where l is the hours of leisure
L is the hours of work
w is the real wage per unit time and C is the consumption

Question 2

what is the fomrula for the budget constraint?

Answer 2

C+ wl = w or C=w(1-l)

Question 3

what is the slope of the budget constraint

Answer 3

it is equal to the wage per unit time

Question 4

what does the indifference curve show for consumption leisure bundles?

Answer 4

it shows all consumption leisure bundles which yield the same level of utility

Question 5

what is the margianl rate of subsitution of leisure for consumption?

Answer 5

the rate at which the household is willinging to substitute leisure for consumption keeping the utility constant

Question 6

what is the consumption leisure utility function?

Answer 6

U(C,l) = U(C,1-L)
the preferences are monotonic meaning that the utility function is increasing in both arguements

Question 7

does utility increase or decrease with labour?

Answer 7

it is decreasing with labour

Question 8

does utility increase or decrease with consumption

Answer 8

it is increasing with consumption

Question 9

what is the consumers reaction to a changes in real wage?

Answer 9

there is a substitution effect - as wage increases, leisure becomes more expensive relative to consumption goods, the houshold substitutes away from leisure to consumption, which has become relatively cheaper
there is an income effect - as wage increases, labour income for a given amount of labour increases, the household can consume more consumption goods and more leisure