Consumption -Applications Labour Supply Budgets Suppose a consumer has savings m. Income is spent on c lots of consumption goods the numeraire good. TH nsumer works for L hours, earning wage w per hour. There are only L hours available. The budget line is given by c=m+wL. This can be rewritten as c+u(L-L)=m+w. This has a better interpretation. u, the wage, is the price of leisure and m aL is the endowment income get line slope=一 Leisure=L-L 0 L Notice the consumer cannot have more than l hours of leisure or work Consumption-Applicatiorsa Labour Supply - Choice Since the er values consumption and leisure, both are goods. Indifference curves are easily drawn. L-L Reading from the graph, L-L' is the optimal amount of leisure and L' is the optimal amount of labour supplied. eis the optimal amount of consumption. Notice if Leisure =L, no labour What happens when wages increaseConsumption — Applications 5 Labour Supply — Budgets • Suppose a consumer has savings m. Income is spent on c lots of consumption goods — the numeraire good. The consumer works for L hours, earning wage w per hour. There are only L hours available. • The budget line is given by c = m + wL. This can be rewritten as c + w(L − L) = m + wL. This has a better interpretation. w, the wage, is the price of leisure and m + wL is the endowment income. • Since both are goods plot leisure against consumption to give the budget set. ................................................................................................................................................................................................................................................................................. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 0 c Leisure = L − L L BS Budget line slope = −w • Endowment m m + wL ............. ............. ............. ............. ............. ............. ............. ............. ............. • Notice the consumer cannot have more than L hours of leisure or work. Consumption — Applications 6 Labour Supply — Choice • Since the consumer values consumption and leisure, both are goods. Indifference curves are easily drawn. . .................................................................................................. ................................................................................................................................................................................................................................................................................. ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ................................................................................................................................ ...... ...... ... ...... ...... ...... ... ................................................................................................................................ ............... ..................... .......................................................................... ...... ...... ... ...... ...... ...... ... .......................................................................... ............... ..................... 0 c Leisure = L − L L ∗ L − L ∗ • c ∗ • . . . . . ............. ............. ............. ............. ............. ........... • Reading from the graph, L − L ∗ is the optimal amount of leisure and L ∗ is the optimal amount of labour supplied. c ∗ is the optimal amount of consumption. Notice if Leisure = L, no labour is supplied — a corner solution. • It is usually assumed that leisure is a normal good. Leisure time should increase as income increases. • What happens when wages increase?