Econ week 13

Leisure Lover

- Places a high value on leisure - Have relatively steeper indifference curves: looks like an "L" - They are willing to sacrifice a large amount of income to get a small increase in leisure

Factors that lead to choose L*=T (H*=0)

1. preference leisure lover 2. Income high leve of non labor income 3. wage each hr spent on leisure does not cost much in a forgone wage

MRPL (marginal revenue product of labor)

P*MPL or ΔTR/Δq or MR x MPL ; value firm places on marginal worker; demand curve for labor

Labor Budget Constraint Equation : Money

pX = wH + V pX = expenditure on all goods wH = labor earning v= non labor income wH + V = total income (from labor and other sources)

Combined budget constraint

px+ xL =wT + V Left: total expenditure on goods goods and eisure Riight: total enfowment of time and money = "full income"

scale effect labor

size depends on how much q falss when w increases

reservation wage

the lowest wage a worker would accept for a given job

Labor Budget Constraint Equation: Time

T = L + H T = time enfowment L= hours of leisure H= hours worked

substiution effect dominates

at low wages ie labor supply function ipward sloping at low w minim wage workers unlikely to reduce hrs worked due to income gain

Labor Market Demand Increase

become more productive improved education, tech changes

MRPL curve

forms short run demand curve for L Line after maxium marginal product of labor

Demand for output increase effect on labor markets

increase for both wage and demand

Assume a worker consumes (only) leisure and a bundle of "all other goods" (referred to as X), and has standard-looking indifference curves. Which of the following is not a correct characterization of this worker's reservation wage?

If the offered wage equals the reservation wage, the worker will consume no X.

Labor Supply vs Consumer Demand

People deman on output markets and supply of the labor market

A market with few barriers to entry and many firms selling differentiated products is called

a monopolistically competitive market.

Labor Supply Decision

decide by comparing the value of time spent at *leisure/at home* against the value of time spent in *market/work force* ...which ever is greater determines whether we go to work or stay home.

Assume a worker has "standard looking" indifference curves for leisure and "all other goods." If this worker's wage increases, the substitution effect will

decrease leisure, regardless of whether it is viewed as normal or inferior.

substitution effect labor

depends on curvature od the isoquants uncurved isoquant means L and K are easily substituted in production curved isoquants mean L and K are not easily substituted in production

income effect dominates (maybe)

higher wages at very high wages the next pay raise incduse some workers to start working less enjoying more leisure backward bending

Production isoquant is tangent to isocost line

ie slope of isowuant = slope of isocost line MRTS = w/r MPL/MPK= w/r or MPL =MPK/r

Labor Market Supply Increase

increase in amount of worker

Labor Market Supply Curve

indicidual works supply curve added together not needed to differencienate between short and long run

A firm should always hire more labor when the marginal revenue product of labor

is less than the wage rate. wages would never increase above the marginal revenue product. profit-maximizing firms will hire workers up to the point where the marginal revenue product is equal to the wage rate because it is not efficient for a firm to pay its workers more than it will earn in revenues from their labor.

When the firms that make up an oligopoly reach a Nash equilibrium,

no firm has an incentive to alter its price-output combination.

P = MC Rule

A variation of the MR = MC rule for those firms operating in perfectly competitive markets. In such markets, firms are price takers. Thus, the price they must deal with (which has been determined by the forces of supply and demand) is in fact the same as a firm's marginal revenue. When P = MC at multiple outputs, the firm should choose the one on the positively sloped part of the marginal cost curve (the output on the negatively sloped part is a profit minimum). Firms using this rule must also be careful that the price is greater than average variable cost as well as equal to marginal cost (i.e. AVC < P = MC). If a firm cannot operate at the production level where this condition holds, it should shut down its operations.

short-run demand for the labor curve (SR dL=MRPL) is less elastic than

the long-run deman for labor curve (LR dL) In the short run the substitution effect is zro K is fixed so the firm has no ability to substitute k for L

conspicuous consumer

views both c and as "good" goods but relativelly fond of x (left)

profit-maximizing input level

w*= MRPL same as P* = MC

Effect of Increase in minimum wage labor markets

workers hor are reduced and/ or workers are terminated (moves to the left on demand curve, DOES NOT SHIFT LINE) in long run L will decrease more because firms can substitute k for l

P = MC alternatives

ΔTC/Δq ΔVC/Δq Δ(w*L)/Δq w*x(ΔL/Δq) w*1/MPᴸ (marginal product of labor)