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Allocation Between the Household and the Labor Market The Indifference Curve Substitution in Consumption vs. Production.

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Presentation on theme: "Allocation Between the Household and the Labor Market The Indifference Curve Substitution in Consumption vs. Production."— Presentation transcript:

1 Allocation Between the Household and the Labor Market The Indifference Curve Substitution in Consumption vs. Production

2 Rational Consumer Notation P – Preferred I – Indifferent A, B, C, etc. Represent Bundles of goods Rule 1- More is preferred to less

3 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

4 Indifference Curve.A.A.B.B.C.C.D.D Good X Good Y

5 Indifference Curve.A.A.B.B.C.C.D.D Good X Good Y

6 Properties of Indifference Curves Good Y Good X.A.A.B.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

7 Budget Constraint Good X Good Y

8 Convex vs. Concave Indifference Curves Good X Good Y.A.A.B.B.C.C Concave

9 Maximize Utility Good X Good Y.A.A.B.B.C.C Convex

10 TWO SEPARATE HOUSEHOLDS Significant A Home Goods Market Goods Home Goods Market Goods Significant B 50 90 80 30

11 COMBINED INCOME Market Goods Home Goods 130 120

12 Percapita Consumption of Combined Household Market Goods 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

13 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

14 TWO SEPARATE HOUSEHOLDS Significant A Home Goods Market Goods Home Goods Market Goods Significant B 50 90 80 30

15 If as a Household more Inclined towards Market goods Market Goods Home Goods 50 90 80 30 65 60

16 If as a Household more Inclined towards Home goods Market Goods Home Goods 50 90 80 30 65 60

17 If as a Household is somewhat indifferent between Market and Home goods Market Goods Home Goods 50 90 80 30 65 60

18 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

19 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

20 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

21 Indifference Curves in Labor Market Good Y Convex 0 16 0 Hours for NonMkt Time Hours for Mkt Time

22 Budget Constraint 16 0 16 A B Hours for NonMkt Time Hours for Mkt Time 190 Market Goods 150

23 Reservation Wage 16 0 16 A B Hours for NonMkt Time Hours for Mkt Time 192 Market Goods 96 8888 So at a wage of $12 an hour this individual would work 8 hours

24 Reservation Wage 16 0 16 A B Hours for NonMkt Time Hours for Mkt Time 192 Market Goods 96 8888 So at a wage of $12 an hour this individual would not work

25 Reservation Wage 16 0 16 A B Hours for NonMkt Time Hours for Mkt Time 192 Market Goods 96 8888 Which of these individuals is more likely to represent a Hispanic immigrant and which represent a second or third generation Hispanic 1 2

26 Impact of Additional Wage on the Work/Leisure Decision 16 0 16 A B Hours for NonMkt Time Hours for Mkt Time 192 Market Goods 96 8888 At higher wage this person Works less hours (Income Effect Overpowers Substitution Effect) Decrease the Working Hours

27 Impact of Additional Wage on the Work/Leisure Decision 16 0 16 A B Hours for NonMkt Time Hours for Mkt Time 192 Market Goods 96 8888 At higher wage this person Works more hours (Substitution Effect Overpowers Income Effect) Increase the Working Hours


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