Topic 5: Household production & Life cycle spending Flashcards
What is the household production model?
M model where utility is created by combining products with time. As a result, there is a tradeoff to be made between time spent on leisure (consuming products) and working, aquiring more income for more products.
Show on a graph an equilibrium in the household production model. Then show the result of a wage increase
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Explain the income & substitution effect in the household production model. What are the implications for labour supply?
Substitution effect for a wage increase is an increase in labour supply. The income effect can increase or decrease labour supply. The net result is ambigous.
What is the join household production model?
The household production model where the budget constraint is the joint constrain of all members in the household
What is the discouraged worker effect?
Where someone losing their job becomes convinced seeking employment is futile, and so decreases their observable labour supply to the market`
What is the additional worker effect?
Where in a houshold, one member losing their job or having reduced hours causes another member of the household to increase their labour supply
What is the relative magnitudes of the discouraged worker & additional worker effect?
The additional worker effect is smaller in magnitidude, so in practise the net affect is a decrease in labour supply in tough economic conditions
What is the expected wage?
The wage expected given the wage when employed and the probability of being sacked
E(w) = p*w
How is a retirement age chosen?
By considering the sum availiable upon retirement, and how this will change with different choices of retirement age. The sum is considered in present value terms.
Give a graph showing how ones choice of retirement age might change given an increase in the sum availiable for retirement
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