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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

Allocation Between the Household and the Labor Market

The Indifference Curve

Substitution in Consumption vs. Production

rational consumer
Rational Consumer
  • Notation
    • P – Preferred
    • I – Indifferent
    • A, B, C, etc. Represent Bundles of goods
  • Rule 1- More is preferred to less
rational consumer1
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
Indifference Curve

Good Y

.D

.C

.B

.A

Good X

indifference curve1
Indifference Curve

Good Y

.D

.C

.B

.A

Good X

properties of indifference curves
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

budget constraint
Budget Constraint

Good Y

Good X

maximize utility
Maximize Utility

Good Y

.A

Convex

.C

.B

Good X

two separate households
TWO SEPARATE HOUSEHOLDS

Significant A

Significant B

80

50

Market Goods

Market Goods

90

30

Home Goods

Home Goods

combined income
COMBINED INCOME

130

Market Goods

120

Home Goods

percapita consumption of combined household
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

so what will they consume
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 households1
TWO SEPARATE HOUSEHOLDS

Significant A

Significant B

80

50

Market Goods

Market Goods

90

30

Home Goods

Home Goods

if as a household more inclined towards home goods
If as a Household more Inclined towards Home goods

80

Market Goods

65

50

30

60

90

Home Goods

if as a household is somewhat indifferent between market and home goods
If as a Household is somewhat indifferent between Market and Home goods

80

Market Goods

65

50

30

60

90

Home Goods

alternatives
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
alternatives1
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
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 market1
Indifference Curves in Labor Market

Good Y

Convex

16

0

0

16

Hours for NonMkt Time

Hours for Mkt Time

budget constraint1
Budget Constraint

Market Goods

190

150

B

A

0

16

Hours for NonMkt Time

Hours for Mkt Time

16

0

reservation wage
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

reservation wage1
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

reservation wage2
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

impact of additional wage on the work leisure decision
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

impact of additional wage on the work leisure decision1
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