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Allocation Between the Household and the Labor Market

Allocation Between the Household and the Labor Market. The Indifference Curve Substitution 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.

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Allocation Between the Household and the Labor Market

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  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 Good Y .D .C .B .A Good X

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

  6. Properties of Indifference Curves A I C A I B Good Y .A So A and B should be indifferent and A is preferred To B at the same time .B . C Good X A P B

  7. Budget Constraint Good Y Good X

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

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

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

  11. COMBINED INCOME 130 Market Goods 120 Home Goods

  12. Percapita Consumption of Combined Household 80 Consumption area improved by joining households Market Goods 65 50 Areas that are lost by joining households and consuming in equal parts 30 60 90 Home Goods

  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 Significant B 80 50 Market Goods Market Goods 90 30 Home Goods Home Goods

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

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

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

  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 16 0 0 16 Hours for NonMkt Time Hours for Mkt Time

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

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

  24. Reservation Wage Market Goods So at a wage of $12 an hour this individual would not work 192 96 B A 8 8 0 16 Hours for NonMkt Time Hours for Mkt Time 16 0

  25. Reservation Wage Market Goods Which of these individuals is more likely to represent a Hispanic immigrant and which represent a second or third generation Hispanic 1 192 96 B 2 A 8 8 0 16 Hours for NonMkt Time Hours for Mkt Time 16 0

  26. Impact of Additional Wage on the Work/Leisure Decision Market Goods At higher wage this person Works less hours (Income Effect Overpowers Substitution Effect) 192 96 B Decrease the Working Hours A 8 8 0 16 Hours for NonMkt Time Hours for Mkt Time 16 0

  27. Impact of Additional Wage on the Work/Leisure Decision Market Goods At higher wage this person Works more hours (Substitution Effect Overpowers Income Effect) 192 96 Increase the Working Hours B A 8 8 0 16 Hours for NonMkt Time Hours for Mkt Time 16 0

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