Allocation Between the Household and the Labor Market The Indifference Curve Substitution in...
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Transcript of Allocation Between the Household and the Labor Market The Indifference Curve Substitution in...
Allocation Between the Household and the Labor
Market
The Indifference CurveSubstitution in Consumption
vs. Production
Rational Consumer Notation
P – Preferred I – Indifferent A, B, C, etc. Represent Bundles of
goods
Rule 1- More is preferred to less
Rational Consumer Rule 2- Transitivity
A P B and B P C then A P C A I B and B P C then A P C A P B and B I C then A P C A I B and B I C then A I C A P B and A P C then we do not know
the relation between B and C Rule 3- Completeness
Indifference Curve
.A
.B
.C.D
Good X
Good Y
Indifference Curve
.A.B
.C.D
Good X
Good Y
Properties of Indifference Curves
Good Y
Good X
.A
.B
So A and B should beindifferent and A is preferred
To B at the same time.C
A I C
A I B
A P B
Budget Constraint
Good X
Good Y
Convex vs. Concave Indifference Curves
Good X
Good Y
.A
.B
.C
Concave
Maximize Utility
Good X
Good Y .A
.B
.C
Convex
TWO SEPARATE HOUSEHOLDS
Significant A
Home Goods
Mark
et
Good
s
Home Goods
Mark
et
Good
s
Significant B
50
90
80
30
COMBINED INCOMEM
ark
et
Good
s
Home Goods
130
120
Percapita Consumption of Combined Household
Mark
et
Good
s
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
So what will they consume?
As Individuals And as compared with a joint
household It will depend on the individual
indifference curves And their indifference curves as a
household
TWO SEPARATE HOUSEHOLDS
Significant A
Home Goods
Mark
et
Good
s
Home Goods
Mark
et
Good
s
Significant B
50
90
80
30
If as a Household more Inclined towards Market
goodsM
ark
et
Good
s
Home Goods
50
90
80
30
65
60
If as a Household more Inclined towards Home
goodsM
ark
et
Good
s
Home Goods
50
90
80
30
65
60
If as a Household is somewhat indifferent
between Market and Home goods
Mark
et
Good
s
Home Goods
50
90
80
30
65
60
Alternatives Substitution in Production
Some goods can be produced by Using goods intensive technique
For example, hiring someone to clean the house for you
Using time intensive technique For example, cleaning house yourself
Alternatives Substitution in Consumption
Goods intensive to produce Goods using large amount of market
goods and little nonmarket time Going out to eat Vacation
Goods using large amount of time (time intensive goods)
Raising kids
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
Indifference Curves in Labor Market
Good Y
Convex
0
16
16
0Hours for NonMkt Time
Hours for Mkt Time
Budget Constraint
160
016
A
B
Hours for NonMkt TimeHours for Mkt Time
190
Market Goods
150
Reservation Wage
160
016
A
B
Hours for NonMkt TimeHours for Mkt Time
192
Market Goods
96
88
So at a wage of $12 an hourthis individual would work
8 hours
Reservation Wage
160
016
A
B
Hours for NonMkt TimeHours for Mkt Time
192
Market Goods
96
88
So at a wage of $12 an hourthis individual would
not work
Reservation Wage
160
016
A
B
Hours for NonMkt TimeHours for Mkt Time
192
Market Goods
96
88
Which of these individuals is more likely to represent a Hispanic immigrant and which represent
a second or third generation Hispanic
1
2
Impact of Additional Wage on the Work/Leisure
Decision
160
016
A
B
Hours for NonMkt TimeHours for Mkt Time
192
Market Goods
96
88
At higher wage this personWorks less hours
(Income Effect Overpowers Substitution Effect)
Decrease the
Working Hours
Impact of Additional Wage on the Work/Leisure
Decision
160
016
A
B
Hours for NonMkt TimeHours for Mkt Time
192
Market Goods
96
88
At higher wage this personWorks more hours
(Substitution Effect OverpowersIncome Effect)
Increase the
Working Hours