1、Next pageCopyright 2008 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/IrwinChapter 2The Theory of Individual Labor SupplyJump to first page2-2-2 21.The Work-Leisure Decision:Basic ModelJump to first page2-2-3 3Individuals choose between work and leisure.Work is time spent on a pay
2、ing job.Leisure includes activities where one is not paid.EducationRestWork within the householdAssumptionsJump to first page2-2-4 4Indifference Curve Leisure HrIncome/day240 The indifference curve shows work and leisure combinations that yield the same amount of total utility.More hours of leisure
3、implies fewer hours of work.240Work HrJump to first page2-2-5 5Negative slope To keep the level of utility the same,if one get more leisure,some of income must be given up.Convex to originWith low hours of leisure,individuals are willing to give up a large amount of income to get 1 more leisure hour
4、.With high hours of leisure,individuals are willing to give up a small amount of income to get 1 more leisure hour.Indifference Curve PropertiesJump to first page2-2-6 6Marginal Rate of SubstitutionLeisureIncome/day3 49824041 The marginal rate ofsubstitution(MRS)is the amount of income one must give
5、 up to compensate for 1 more hour if leisure.At 3 hours of leisure(21 hours of work),one must give up 4 units of income to compensate for 1more hour of leisure.240Work At 8 hours of leisure(16 hours of work),one must give up 1 unit of income to compensate for 1 more hour of leisure.The MRS falls as
6、one moves southeast along an indifference curve.Jump to first page2-2-7 7Indifference MapLeisureIncome/day240 Curves further from the origin indicate higher utility.I1I2I3L2L1Y2Y1 Combination L2Y2 is preferred to combination L1Y1 since one gets both more income and more leisure.A person will maximiz
7、e utility by getting to the highest attainable indifference curve.Jump to first page2-2-8 8Work-Leisure PreferencesLeisureIncome/day240“Leisure lovers”place a high value on leisure.The have a steep indifference curve.They are willing to sacrifice a large amount of income to get a small increase in l
8、eisure.I1I2“Workaholics”place a low value on leisure.The have a flat indifference curve.They must be given a large increase in leisure to compensate for a small decrease in income.IAIBJump to first page2-2-9 9Budget ConstraintLeisureIncome/day240 The budget constraint shows the combinations of incom
9、e and leisure that a worker could get given a wage rate.$120 At a wage rate of$5,a worker could get a maximum income of$120 per day($5/hour*24).At a wage rate of$10,a worker could get a maximum income of$240 per day.At a wage rate of$15,a worker could get a maximum income of$360 per day.$240$360 The
10、 slope of the budget constraint iswage rate.Jump to first page2-2-1010Utility MaximizationLeisureIncome/day240 The optimal or utility maximizing point is where the budget constraint is tangent to the highest attainable indifference curve(U).$240I1I2I316$80U At U,the MRS(slope of the indifference cur
11、ve)is the equal to the wage rate(slope of the budget constraint)At B,the MRS is greater than the wage rate.The individual values leisure more than the wage rate.BA At A,the MRS is less than the wage rate.The individual values leisure less than the wage rate.Jump to first page2-2-1111Backward Bending
12、 Labor Supply CurveHours of WorkWage Rate240 For a given person,hours of work may increase as the wage rate rises.8 10$10$25 If the wage rate rises from$10 to$25 per hour hours of work rises from 8 to 10 hours per day.Above$25 per hour,hours of work fall.SL The backward bending labor supply curve is
13、 the result of theincome and substitution effects of a wage change.Jump to first page2-2-1212Income Effect The change in desired hours of work resulting from a change in income,holding the wage constant.Leisure is a normal good,so higher income implies a desire for more leisure(fewer hours of work).
14、For a wage increase,income is raised and so the income effect lowers desired work hours.Income EffectJump to first page2-2-1313Substitution Effect The change in desired hours of work resulting from a change in the wage rate,holding income constant.A higher wage rate raises the relative price of leis
15、ure.For a wage increase,the substitution effect raises desired work hours.Substitution EffectJump to first page2-2-1414For Wage Increases If substitution effect income effect,then hours of work rise.If income effect substitution effect,then hours of work fall.For Wage Decreases If substitution effec
16、t income effect,then hours of work fall.If income effect substitution effect,then hours of work rise.Net EffectJump to first page2-2-1515Income and Substitution EffectsLeisureIncome/day240 At a wage rate of$10/hour,the optimal hours of leisure is 16(8 hours of work)at point U1.$240I1I216U1 If the wage rate rises to$15/hour,the optimal hours of leisure is 15 at point U2.The income effect(IE)is measured through a parallel shift of the old budget constraint.The IE is from U1 to U2(from 16 to 17 hou
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