Household Consumption and Labor Market: Indifference Curves & Budget Constraints, Slides of Economics

Download Household Consumption and Labor Market: Indifference Curves & Budget Constraints and more Slides Economics in PDF only on Docsity! Allocation Between the Household and the Labor Market The Indifference Curve Substitution in Consumption vs. Production Docsity.com Rational Consumer • Notation – P – Preferred – I – Indifferent – A, B, C, etc. Represent Bundles of goods • Rule 1- More is preferred to less Docsity.com Indifference Curve .A .B .C .D Good X Good Y Docsity.com Properties of Indifference Curves Good Y Good X .A .B So A and B should be indifferent and A is preferred To B at the same time . C A I C A I B A P B Docsity.com Budget Constraint Good X Good Y Docsity.com TWO SEPARATE HOUSEHOLDS Significant A Home Goods Home Goods Significant B 50 90 80 30 Docsity.com COMBINED INCOME M ar ke t G oo ds Home Goods 130 120 Docsity.com Percapita Consumption of Combined Household M ar ke t G oo ds Home Goods 50 90 80 30 65 60 Consumption area improved by joining households Areas that are lost by joining households and consuming in equal parts Docsity.com If as a Household more Inclined towards Market goods M ar ke t G oo ds Home Goods 50 90 80 30 65 60 Docsity.com If as a Household more Inclined towards Home goods M ar ke t G oo ds Home Goods 50 90 80 30 65 60 Docsity.com If as a Household is somewhat indifferent between Market and Home goods M ar ke t G oo ds Home Goods 50 90 80 30 65 60 Docsity.com Indifference Curves in Labor Market • On the vertical axis are the market goods • On the horizontal axis there is the number of hours that could be dedicated to market time • Budget constrain is based on the wage one would get and the number of hours worked Docsity.com Indifference Curves in Labor Market Good Y Convex 0 16 16 0 Hours for NonMkt Time Hours for Mkt Time Docsity.com Budget Constraint 16 0 0 16 A B Hours for NonMkt Time Hours for Mkt Time 190 Market Goods 150 Docsity.com Reservation Wage 16 0 0 16 A B Hours for NonMkt Time Hours for Mkt Time 192 Market Goods 96 8 8 Which of these individuals is more likely to represent a Hispanic immigrant and which represent a second or third generation Hispanic 1 2 Docsity.com Impact of Additional Wage on the Work/Leisure Decision 16 0 0 16 A B Hours for NonMkt Time Hours for Mkt Time 192 Market Goods 96 8 8 At higher wage this person Works less hours (Income Effect Overpowers Substitution Effect) Decrease the Working Hours Docsity.com Impact of Additional Wage on the Work/Leisure Decision 16 0 0 16 A B Hours for NonMkt Time Hours for Mkt Time 192 Market Goods 96 8 8 At higher wage this person Works more hours (Substitution Effect Overpowers Income Effect) Increase the Working Hours Docsity.com