Topic 1 Labor Supply Flashcards

1
Q

What is labor supply about

A

Number of people choosing to be economically active/inactive - whether you supply yourself to labor market

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2
Q

Explain the work-leisure model

A

Individuals choosing between work/leisure, and explaining the leisure/work combinations yielding same amount of total utility

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3
Q

Draw a graph of indifference curve

A

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4
Q

Why does indifference curve have a negative slope

A

For more leisure, some income must be given up

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5
Q

What happens when individual have low amounts of leisure

A

Willing to give up a large amount of income for 1h of leisure

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6
Q

What happens if individual has high hours of leisure

A

Willing to give up a small amount of income for 1h of leisure

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7
Q

What does the curves steepness represent?

A

The reluctancy to do the exchange of work and leisure

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8
Q

What is marginal rate of substitution

A

MRS - amount of income one must give up to compensate for 1 more hours of leisure.

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9
Q

What happens to MRS when you move down the indifference curve

A

It falls

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10
Q

Why is there multiple indifference curves?

A

Individual seeks to attain the highest curve, which gives the most utility, i.e. Higher income and hours of leisure

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11
Q

Explain workaholic

A

Values work, flat indifference curve, willing to give up a large amount of leisure for small increase in income. Must be given large increase in leisure to compensate small decrease in income

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12
Q

Explain leisure lover

A

Values leisure, steep indifference curve. Willing to give up a large amount of income for a small little increase in leisure

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13
Q

What is the most constraininng factor in the model

A

Wage - leading to utility maximization

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14
Q

Explain budget constraint

A

Where The budget constraint tangent touches the highest attainable income indifference curve - with indifference curve shows combination of income and leisure a worker would get given at a wage rate. MRS equals to budget constraint!

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15
Q

Draw and explain backwards bending labor supply curve

A

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16
Q

Explain income effect

A

As income raises the desire to work decreases as people want more leisure time to spend income

17
Q

Explain substitution effect

A

As wage raises the desire to work more hours raises. Substitute leisure for income higher wage rate increases the relative price of leisure

18
Q

Illustrate income and substitute effect on the budget constraint and indifference curve. Explain effects

A

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19
Q

What does the evidence state

A

Slightly more backwards bending for men, substitute effect create than income effect for women

20
Q

What does elasticity of labor supply measure?

A

The responsiveness of desired hours of work to wage rate - Formula if needed

21
Q

What happens with non-labor income to budget constraint

A

Budget constraint has a parallel shift. Lessens willingness to work & income effect occurs

22
Q

What are examples of nonlabor income

A

Rent payments, capital gains, investment profits, inheritance

23
Q

What makes an individual less likely to participate to labor market?

A

Steep indifference curve, high nonwage income & low wage rate

24
Q

What makes an individual likely to participate in the labor market

A

Higher wage rate, low nonwage income and flat indifference curve

25
What is reservation wage?
The lowest wage necessary to induce someone to work
26
Illustrate over and under employment, explain
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