Topic 1 Labor Supply Flashcards
What is labor supply about
Number of people choosing to be economically active/inactive - whether you supply yourself to labor market
Explain the work-leisure model
Individuals choosing between work/leisure, and explaining the leisure/work combinations yielding same amount of total utility
Draw a graph of indifference curve
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Why does indifference curve have a negative slope
For more leisure, some income must be given up
What happens when individual have low amounts of leisure
Willing to give up a large amount of income for 1h of leisure
What happens if individual has high hours of leisure
Willing to give up a small amount of income for 1h of leisure
What does the curves steepness represent?
The reluctancy to do the exchange of work and leisure
What is marginal rate of substitution
MRS - amount of income one must give up to compensate for 1 more hours of leisure.
What happens to MRS when you move down the indifference curve
It falls
Why is there multiple indifference curves?
Individual seeks to attain the highest curve, which gives the most utility, i.e. Higher income and hours of leisure
Explain workaholic
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
Explain leisure lover
Values leisure, steep indifference curve. Willing to give up a large amount of income for a small little increase in leisure
What is the most constraininng factor in the model
Wage - leading to utility maximization
Explain budget constraint
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!
Draw and explain backwards bending labor supply curve
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Explain income effect
As income raises the desire to work decreases as people want more leisure time to spend income
Explain substitution effect
As wage raises the desire to work more hours raises. Substitute leisure for income higher wage rate increases the relative price of leisure
Illustrate income and substitute effect on the budget constraint and indifference curve. Explain effects
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What does the evidence state
Slightly more backwards bending for men, substitute effect create than income effect for women
What does elasticity of labor supply measure?
The responsiveness of desired hours of work to wage rate - Formula if needed
What happens with non-labor income to budget constraint
Budget constraint has a parallel shift. Lessens willingness to work & income effect occurs
What are examples of nonlabor income
Rent payments, capital gains, investment profits, inheritance
What makes an individual less likely to participate to labor market?
Steep indifference curve, high nonwage income & low wage rate
What makes an individual likely to participate in the labor market
Higher wage rate, low nonwage income and flat indifference curve
What is reservation wage?
The lowest wage necessary to induce someone to work
Illustrate over and under employment, explain
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