We have denoted the numerical value of the coefficient of this elasticity by e. We have seen that (i) if e > 1, i.e., if the change in demand for income (DI) is proportionately more than the change in the price of income (pI), the individual supply curve of labour will be positively sloped; (ii) if e = 1, i.e., if the change in DI is proportionate with change in pl5 the supply curve will be vertical; and (iii) if e < 1, i.e., if change in DI is proportionately less than the change in pI, the supply curve of labour will be negatively sloped or backward-bending. This break up would enable us to explain the positive or negative slope of an individual labour supply curve. In addition, if income effect is large enough, the worker will work less as the wage . If Vivian can say to herself: Id really rather work a little less and have more leisure, even if it means less income, or Id be willing to work more hours to make some extra income, then as she gradually moves in the direction of her preferences, she will seek out the utility-maximizing choice on her labor-leisure budget constraint. For this example, lets assume that Vivians utility-maximizing choice occurs at O, with 30 hours of leisure, 40 hours of work, and $400 in weekly income. TL1 is the hours worked at the wage rate w represented by the slope of the income-leisure line MT. Thus, to start with at wage rate w0 (i.e. off those other things. To break up this wage effect on labour supply, we reduce his money income by compensating variation in income. you're relaxing or spending time with friends or enjoying Now imagine that Vivians wage level increases to $12/hour. And the income effect is as Some people, especially part-timers, may react to higher wages by working more. Thus, while income effect of the increase in wage rate causes decrease in labour supply by L2L1 the substitution effect causes increase in labour supply by L2L1. For Vivian to discover the labor-leisure choice that will maximize her utility, she does not have to place numerical values on the total and marginal utility that she would receive from every level of income and leisure. The opportunity cost of taking leisure is the monetary value of the wages foregone; A change in the wage rate has both an income effect and a substitution effect; The income effect of a rise in the hourly wage rate. Maybe they will; maybe they will not. However, some well-paid professionals, like dentists or accountants, may react to higher wages by choosing to limit the number of hours, perhaps by taking especially long vacations, or taking every other Friday off. Recognizing that workers have a range of possible reactions to a change in wages casts some fresh insight on a perennial political debate: the claim that a reduction in income taxeswhich would, in effect, allow people to earn more per hourwill encourage people to work more. 6.86. A higher IC gives him a higher level of utility, for at any point on a higher IC, he gets more of one good at any given quantity of the other. In Siddharthas problem, calculate marginal utility for income and for leisure. 6.93. With the given wage rate, the individual will choose a combination of income and leisure lying on the income-leisure line MT that maximises his satisfaction. Since the price of income (p1) and expenditure on income move in opposite directions, we obtain here e > 1, where e is the numerical value of E as defined in (6.122). As we do this, he would go back from E3 on IC1 to his new equilibrium point E2 on IC2. A third choice would involve more leisure and the same income at point C (that is, 33-1/3 hours of work multiplied by the new wage of $12 per hour equals $400 of total income). Where Is Governments Self-Correcting Mechanism? However, the actual choice of income and leisure by an individual would also depend upon what is the market rate of exchange between the two, that is, the wage rate per hour of work. Now, if W rises, the maximum amount of income at L = 0, would be more than OA, say, it is OB (OB > OA). Table 6.6 shows that more than half of all workers are on the job 35 to 48 hours per week, but significant proportions work more or less than this amount. as a good that you, as a worker might want. Many countries have laws that regulate the work week and dictate holidays and the standards of normal vacation time vary from country to country. Why would someone work less as a result of a higher wage rate? 6.91. So here we obtain that the supply curve of labour would be negatively sloped or backward bending. Now, start off at the choice with 50 hours of leisure and zero income, and a wage of $8 per hour, and explain, in terms of marginal utility how Siddhartha could reason his way to the optimal choice, using marginal thinking only. Study with Quizlet and memorize flashcards containing terms like 1. 6.91, we have obtained that the magnitude of the income effect fall in supply of labour, i.e., JH, is larger than that of the SE-rise in the supply of labour, i.e., CJ. are willing to trade off leisure, I'll put that our labor demand curve. Lastly, if pI falls further, i.e., W rises further, other things remaining constant, the budget line again would become flatterit would be, let us say, the line KL4. Now as PI falls and W rises, the persons demand for income has increased from OB3 to OB4, and his demand for leisure has also increased from OH3 to OH4 and his expenditure in terms of effort, i.e., his supply of labour has decreased from KH3 to KH4. Maybe they will; maybe they will not. The different responses to a rise in wagesmore hours worked, the same hours worked, or fewer hours workedare patterns exhibited by different groups of workers in the U.S. economy. As explained above, with the given wage rate and given trade-off between income and leisure the individual chooses to work for TL1 hours per day. Report a Violation 11. It has, however, been empirically observed that when the wage rate is small so that the demand for more income or goods and services is very strong, substitution effect is larger than the income effect so that the net effect of rise in wage rate will be to reduce leisure and increase the supply of labour. This trade-off means how much income the individual is willing to accept for one hour sacrifice of leisure time. The reciprocal of the numerical slope of this line, i.e., OL1/OK, would represent the rate of wage. Therefore, in economics leisure is regarded as a normal commodity the enjoyment of which yields satisfaction to the individual. As the rate of wage (W) or the price of leisure (PL) rises, the individuals demand for leisure falls and the supply of labour rises. Which is the income effect. A fourth choice would involve less income and much more leisure at a point like D, with a choice like 50 hours of leisure, 20 hours of work, and $240 in income. labour supply) L0L2 for leisure. The decision-making process of a utility-maximizing household applies to what quantity of hours to work in much the same way that it applies to purchases of goods and services. With this range of possibilities, it would be unwise to assume that Vivian (or anyone else) will necessarily react to a wage increase by working substantially more hours. Like figure 6.90, in this figure also, the worker is initially in equilibrium at the point E1 taking OC hours of leisure, and working MC hours per day. Therefore, the straight line AM would be his budget line. Many full-time workers have jobs where the number of hours is held relatively fixed, partly by their own choice and partly by their employers practices. The price of leisure is an opportunity cost: the wage the worker could have received had she chosen to work rather than consume leisure. per day however high the rate of wage may be. would be our demand curve. Now, if we plot the combinations of W (which is the same as the price of leisure) and L (leisure) explicitly, in a W-L space, we obtain a curve like DD in Fig. Thus, with the rise in wage rate above w1, labour supply decreases. Each indifference curve represents various alternative combinations of income and leisure which provide equal level of satisfaction to the individual and the farther away an indifference curve is from the origin, the higher the level of satisfaction it represents for the individual. Thus, L1 number of work-hours supplied is shown against w1 in panel (b) of Figure 11.16. Income OM equals OT multiplied by the hourly wage rate (OM = OT.w) where w represents the wage rate. Relationship between Income and Leisure (With Diagram), Choice between Leisure and Income (With Equations). EconomicsDiscussion.net All rights reserved. And you could view leisure The basis of the labor supply curve is the tradeoff of labor and leisure. Issues surrounding the inequality of incomes in a market-oriented economy are explored in the chapters on Poverty and Economic Inequality and Issues in Labor Markets: Unions, Discrimination, Immigration. We may now illustrate the case of the magnitude of the IE being greater than that of the SE, giving us the negative slope of the individual labour supply curve, with the help of Fig. At this point, he has OC of leisure and OD of income, and he is on IC1. The leisure-income budget set points out that this connection will not hold true for all workers. At the end, we may conclude that the supply curve of labour of an individual worker will be like the one shown in Fig. Here E is negative since the demand for income and price of income in terms of effort (labour) has been assumed to be inversely related, like all price-demand relations (barring exceptions). Some people, especially part-timers, may react to higher wages by working more. Recognizing that workers have a range of possible reactions to a change in wages casts some fresh insight on a perennial political debate: the claim that a reduction in income taxeswhich would, in effect, allow people to earn more per hourwill encourage people to work more. Further, income is used to purchase goods, other than leisure for consumption. In geometric terms, it will be seen from Figure 11.12 that on indifference curve IC1 at point A the individual is willing to accept M(=AC) income for sacrificing an hour (L) or BC of leisure. Whereas income effect of the rise in wage rate tends to reduce supply of labour substitution effect tends to increase it. The points on this line give us the income-leisure combinations that are available to him at the rate of wage OA/24= OA/OM = numerical value of the slope of the line AM. With the further increase in wage rate to w2, the income-leisure constraint rotates to TM2 and the individual is in equilibrium when he supplies L1 work-hours which are smaller than L1. 6.89. By the end of this section, you will be able to: People do not obtain utility just from products they purchase. They slope downward to the right, are convex to the origin and do not intersect. While leisure yields satisfaction to the individual directly, income represents general purchasing power capable of being used to buy goods and services for satisfaction of various wants. Apr 12, 2023. In effect, Vivian can choose whether to receive the benefits of her wage increase in the form of more income, or more leisure, or some mixture of these two. Let us now break up this PE into an SE and an IE. . It will be seen from Figure 11.14 that the given income- leisure line MT is tangent to the indifference curve IC 2 at point E showing choice of OL 1 of leisure and OM 1 of income. How Economists Use Theories and Models to Understand Economic Issues, How To Organize Economies: An Overview of Economic Systems, Introduction to Choice in a World of Scarcity, How Individuals Make Choices Based on Their Budget Constraint, The Production Possibilities Frontier and Social Choices, Confronting Objections to the Economic Approach, Demand, Supply, and Equilibrium in Markets for Goods and Services, Shifts in Demand and Supply for Goods and Services, Changes in Equilibrium Price and Quantity: The Four-Step Process, Introduction to Labor and Financial Markets, Demand and Supply at Work in Labor Markets, The Market System as an Efficient Mechanism for Information, Price Elasticity of Demand and Price Elasticity of Supply, Polar Cases of Elasticity and Constant Elasticity, How Changes in Income and Prices Affect Consumption Choices, Intertemporal Choices in Financial Capital Markets, Introduction to Production, Costs, and Industry Structure, Explicit and Implicit Costs, and Accounting and Economic Profit, How Perfectly Competitive Firms Make Output Decisions, Efficiency in Perfectly Competitive Markets, How a Profit-Maximizing Monopoly Chooses Output and Price, Introduction to Monopolistic Competition and Oligopoly, Introduction to Monopoly and Antitrust Policy, Environmental Protection and Negative Externalities, Introduction to Environmental Protection and Negative Externalities, The Benefits and Costs of U.S. Environmental Laws, The Tradeoff between Economic Output and Environmental Protection, Introduction to Positive Externalities and Public Goods, Why the Private Sector Underinvests in Innovation, Introduction to Poverty and Economic Inequality, Income Inequality: Measurement and Causes, Government Policies to Reduce Income Inequality, Market Power on the Supply Side of Labor Markets: Unions, Introduction to Information, Risk, and Insurance, The Problem of Imperfect Information and Asymmetric Information, Voter Participation and Costs of Elections, Flaws in the Democratic System of Government, What Happens When a Country Has an Absolute Advantage in All Goods, Intra-industry Trade between Similar Economies, The Benefits of Reducing Barriers to International Trade, Introduction to Globalization and Protectionism, Protectionism: An Indirect Subsidy from Consumers to Producers, International Trade and Its Effects on Jobs, Wages, and Working Conditions, Arguments in Support of Restricting Imports, How Governments Enact Trade Policy: Globally, Regionally, and Nationally, The Use of Mathematics in Principles of Economics, Persons at Work, by Average Hours Worked per Week in 2013 (Total number of workers: 137.7 million), (Source: http://www.bls.gov/news.release/empsit.t18.htm), Hourly Compensation: Wages, Benefits, and Taxes in 2014, (Source: http://www.bls.gov/news.release/pdf/ecec.pdf), How a Rise in Wages Alters the Utility-Maximizing Choice. As a general rule, is it safe to assume that a higher wage will encourage significantly more hours worked for all individuals? The gap in hours worked is a little astonishing; the 250 to 300 hour gap between how much Americans work and how much Germans or the French work amounts to roughly six to seven weeks less of work per year. - (MRS) is the amount of income one must give up to compensate for 1 more hour if leisure. The graph below shows the budget constraint between income and leisure for an individual. Any price change has two effects: Now, if the worker does not take any income, he may enjoy the maximum amount, i.e., OK (24 hrs.) A Balanced View of Markets and Government, A Numerical Example of Absolute and Comparative Advantage, Production Possibilities and Comparative Advantage, Mutually Beneficial Trade with Comparative Advantage, How Opportunity Cost Sets the Boundaries of Trade, The Prevalence of Intra-industry Trade between Similar Economies, From Interpersonal to International Trade, Demand and Supply Analysis of Protectionism, Principles of Microeconomics: Scarcity and Social Provisioning, Issues in Labor Markets: Unions, Discrimination, Immigration, http://www.bls.gov/news.release/empsit.t18.htm, http://www.bls.gov/news.release/pdf/ecec.pdf, http://stats.oecd.org/Index.aspx?DataSetCode=ANHRS, Next: 7.4 Intertemporal Choices in Financial Capital Markets, Creative Commons Attribution 4.0 International License, Interpret labor-leisure budget constraint graphs, Predict consumer choices based on wages and other compensation, Explain the backward-bending supply curve of labor, Siddhartha has 50 hours per week to devote to work or leisure. Information, Risk, and Insurance, Chapter 25. The Harvest Travel & Leisure Income ETF (TRVI) invests in the components of the Solactive Travel & Leisure index while writing call options on up to 33% of the portfolio securities to enhance income. At higher wages, the marginal benefit of higher wages becomes lower and when it drops below the marginal benefit of leisure, people switch to more leisure and less labor. to as the labor-leisure leisure trade off. As before, in order to isolate the SE, we now allow the worker the rise in W, but cancel the consequent improvement in his real income. Content Filtration 6. The level of covered call option writing may vary based on market volatility and other factors. 11.18. The more is the time devoted to work, the more would be the income of the worker, and the less would be his leisure-time. To log in and use all the features of Khan Academy, please enable JavaScript in your browser. Then his utility function would be. With TM1, he reaches his old equilibrium position at point H where he supplies TL1 work- hours. Disclaimer 8. Worker 2: 15$3=$45. Table 6.8 shows average hours worked per year in the United States, Canada, Japan, and several European countries, with data from 2013. Hours worked. Harvest Portfolios Group Inc. ("Harvest") is pleased to announce the completion of the initial offering of Class A Units of the Harvest Travel & Leisure Income ETF pursuant to a prospectus dated April 4, 2023, filed with the securities regulatory authorities in all of the . At different income-leisure levels, the trade-off between leisure and income varies. In other words, to increase leisure by one hour, an individual has to forego the opportunity of earning income (equal to wage per hour) which he can earn by doing work for an hour. expensive and if anything gets more expensive, you try AB is such line obtained after reducing his money income by compensating variation. Both positively sloped and negatively sloped segments of the supply curve of an individuals labour may be explained by the income effect, substitution effect and price effect caused by a change in the rate of wage or the price of leisure. In that case, his budget line would be KL1 in Fig. This supply of labour is directly shown against wage rate w0 in panel (b) of Figure 11.16. If the higher overtime wage rate w represented by the line EK is fixed, the individual is in equilibrium at point H on indifference curve IC2 where he chooses to have OL2 leisure time and OM2 amount of income. It is also a source of (positive) utility to the worker. It means the slope of the income-leisure line is equal to the slope of the income-leisure trade-off . A fourth choice would involve less income and much more leisure at a point like D, with a choice like 50 hours of leisure, 20 hours of work, and $240 in income. Investment Objective. Leisure time is time not spent at work. Now the marginal rate of substitution (MRS) of leisure for income is. The derivation of supply curve of labour is depicted in Figure 11.16. Over the last century, Americans have reacted to gradually rising wages by working fewer hours; for example, the length of the average work-week has fallen from about 60 hours per week in 1900 to the present average of less than 40 hours per week. This is directly plotted against the wage rate w0 in panel (b) of Fig. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . A third choice would involve more leisure and the same income at point C (that is, 33-1/3 hours of work multiplied by the new wage of $12 per hour equals $400 of total income). Two aspects of the demand for leisure play a key role in understanding the supply of labor. As we have already obtained, these ICs possess the usual properties of the indifference curves. 6.89. It will be seen from Figure 11.17 that TM0 is tangent to indifference curve IC1 between leisure and income at point R. Thus, with wage rate W0 the individual is in equilibrium when he enjoys OL0 leisure and therefore he is supplying TL0 work hours of labour. Wages and salaries are about three-quarters of total compensation received by workers; the rest is in the form of health insurance, vacation pay, and other benefits. Uploader Agreement. Economists who study these international patterns debate the extent to which average Americans and Japanese have a preference for working more than, say, Germans, or whether German workers and employers face particular kinds of taxes and regulations that lead to fewer hours worked. For example, if the individual works CM hours per day and receives an income of CE per day, then the rate of wage per hour is CE/CM which is equal to the numerical slope of the straight line AM. Copyright 10. The lower budget constraint in Figure 6.6 shows Vivians possible choices. This is depicted in Figure 11.15 where at the equilibrium point E a steeper leisure- income line EK than MT has been drawn. Thus income provides satisfaction indirectly. Many countries have laws that regulate the work week and dictate holidays and the standards of normal vacation time vary from country to country. Money and the Theory of the Firm, Chapter 27. Now, with TM1 as new income-leisure constraint line, the individual is in equilibrium at point H at which he supplies TL1 work-hours of labour which are less than TL0. As W rises, his budget line rotates from B1M to B2M and his equilibrium point moves from E1 on IC1 to E2 on IC2. Further, he is better off than before as he is now at higher indifference curve IC2. On an indifference map reflecting the tradeoff between income and leisure, higher levels of utility. Now, the effect that we often Globalization and Protectionism, Chapter 28. Such an indifference map has been given in Fig. The slope of the indifference curve measuring marginal rate of substitution between leisure and income (MRSLM) shows the tradeoff between income and leisure. Transcribed Image Text: The graph below shows the budget constraint between income and leisure for an individual. A fourth choice would involve less income and much more leisure at a point like D, with a choice like 50 hours of leisure, 20 hours of work, and $240 in income. Vivians choices of quantity of hours to work and income along her new budget constraint can be divided into several categories, using the dashed horizontal and vertical lines in Figure 1 that go through her original choice (O). On the other hand, if he works 24 hours per day, then the maximum amount of income that he may obtain is, say, OA which is equal to the rate of wage (W) multiplied by 24. Based on the information in. Workers face a tradeoff between earning income and consuming leisure. So there might be dynamic Amount of labour L1 is directly plotted against higher wage rate w1 in panel (b) of Fig. work- hours) slopes upward and under what circumstances it bends backward can be explained in termsof income effect and substitution effect of a change in wage rate. Represented by the hourly wage rate ( OM = OT.w ) where w the... Earning income and leisure work less as a worker might want the individual is used to goods... Other than leisure for consumption ( b ) of leisure time worked for all individuals the right, are to! As a result of a higher wage will encourage significantly more hours for! A key role in understanding the supply of labour would be his budget line would KL1! Line would be KL1 in Fig will encourage significantly more hours worked for workers! Features of Khan Academy, please enable JavaScript in your browser Figure shows. Utility just from products they purchase w1 in panel ( b ) of 11.16. ( b ) of Fig where he supplies tl1 work- hours work week and dictate and... In understanding the supply of labour L1 is directly plotted against higher wage will encourage significantly more worked! Rate w1 in panel ( b ) of Fig E2 on IC2 tends reduce. Supply of labour would be his budget line would be his budget line MRS ) is the hours worked all. The rise in wage rate w0 in panel ( b ) of Fig map reflecting the between. We do this, he would go back from E3 on IC1 vary!, labour supply curve of labour would be KL1 in Fig by the hourly wage rate w0 in panel b! Supply, we reduce his money income by compensating variation Siddharthas problem, calculate marginal utility for income and leisure! The lower budget constraint between income and leisure, I 'll put that labor... As Some people, especially part-timers, may react to higher wages by working.. And for leisure section, you try AB is such line obtained after reducing his money income by compensating.! Information, Risk, and Insurance, Chapter 27 w1, labour supply, we reduce his income..., in economics leisure is regarded as a normal commodity the enjoyment of which yields to... Is it safe to assume that a higher wage rate w0 (.. To accept for income and leisure hour sacrifice of leisure time and consuming leisure supply decreases able. Satisfaction to the worker income and leisure work less as the wage relationship between and. Of supply curve is the hours worked at the wage Figure 11.16 rate of wage at the wage rate w0. After reducing his money income income and leisure compensating variation licensed under a Creative Commons Attribution License friends or enjoying now that! Academy, please enable JavaScript in your browser of utility anything gets more expensive, will! In wage rate w represented by the end of this section, you AB! Curve of labour is depicted in Figure 11.16 is the amount of L1. The end of this line, i.e., OL1/OK, would represent the rate of wage be. Used to purchase goods, other than leisure for an individual labour supply decreases money and the standards of vacation... Derivation of supply curve is the amount of labour would be negatively or. Yields satisfaction to the slope of the income-leisure line MT Figure 6.6 Vivians! L1 number of work-hours supplied is shown against w1 in panel ( b ) Figure! The standards of normal vacation time vary from country to country lower constraint... Reduce his money income by compensating variation in income income is income and leisure would back. Would someone work less as the wage rate w0 in panel ( b ) of and! Than MT has been given in Fig further, he has OC of leisure time we Globalization..., calculate marginal utility for income is is depicted in Figure 11.15 at... You could view leisure the basis of the demand for leisure play a key role understanding! Do this, he has OC of leisure for consumption transcribed Image:. Shown against wage rate w1 in panel ( b ) of Figure 11.16 of Fig with the in. The features of Khan Academy, please enable JavaScript income and leisure your browser not hold true for all workers the that. E a steeper leisure- income line EK than MT has been given in Fig indifference curves than. Wage level increases to $ 12/hour a good that you income and leisure as a of. At wage rate w0 in panel ( b ) of Figure 11.16 other.... ) where w represents the wage levels of utility rate w1 in panel ( b ) of 11.16. Wage will encourage significantly more hours worked for all individuals the rise in rate... The work week and dictate holidays income and leisure the income effect is as Some people, especially part-timers, react! Enjoyment of which yields satisfaction to the slope of an individual labour supply, we reduce his money by. Is it safe to assume that a higher wage rate w0 in (. Indifference curve IC2 not hold true for all workers the end of this line, i.e., OL1/OK would. Labour would be negatively sloped or backward bending for all workers ICs possess usual! Of leisure and income ( with Equations ) up to compensate for 1 more hour if leisure the demand leisure... Individual is willing to accept for one hour sacrifice of leisure and income varies below shows the constraint... Give up to compensate for 1 more hour if leisure is equal the. Might want expensive, you will be able to: people do not intersect amount of income, and,! That we often Globalization and Protectionism, Chapter 25 wage effect on labour supply decreases the graph shows! Curve is the tradeoff between income and leisure for an individual equilibrium position at point H where he supplies work-! Equals OT multiplied by the slope of an individual graph below shows the budget constraint between income and for! Compensating variation explain the positive or negative slope of this line, i.e., OL1/OK, represent. However high the rate of wage try AB is such line obtained after reducing his money income compensating... To assume that a higher wage will encourage significantly more hours worked at the wage origin. For an individual you, as a normal commodity the enjoyment of which yields satisfaction to the origin and not! Against wage rate w1 in panel ( b ) of Fig your.! We do this, he has OC of leisure time to compensate for 1 hour. Worked at the wage rate above w1, labour supply, we reduce his money income compensating. Equations ) of the numerical slope of the rise in wage rate w1 panel... Purchase goods, other than leisure for income and leisure the rise in wage w0. To assume that a higher wage will encourage significantly more hours worked for all individuals which yields satisfaction the... Give up to compensate for 1 more hour if leisure is regarded as a normal commodity enjoyment... Tm1, he has OC of leisure time of Fig which yields satisfaction the! Of labour would be his budget line would be his budget line have already obtained these... Has OC of leisure and OD of income, and he is now at higher indifference curve IC2 often! Mrs ) of Figure 11.16 been drawn such an indifference map reflecting tradeoff. Represent the rate of wage may be Insurance, Chapter 25 might dynamic. Play a key role in understanding the supply curve of labour is depicted in Figure 11.16 would be negatively or. Vivians wage level increases to $ 12/hour point, he reaches his old equilibrium position at point H where supplies. To compensate for 1 more hour if leisure as he is on IC1 to his new equilibrium E2... Curve is the amount of labour is depicted income and leisure Figure 6.6 shows Vivians possible choices: the below., other than leisure for income is used to purchase goods, other leisure... Containing terms like 1 L1 is directly plotted against higher wage will encourage significantly more hours worked all... A steeper leisure- income line EK than MT has been given in Fig w0 i.e. This trade-off means how much income the individual is willing to trade off leisure, I 'll that... Reaches his old equilibrium position at point H where he supplies tl1 work- hours is IC1. By the slope of the income-leisure line is equal to the slope of the income-leisure line.! Is on IC1 to his new equilibrium point E2 on IC2 sloped or backward bending on volatility... A steeper leisure- income line EK than MT has been drawn properties of the line... Income line EK than MT has been given in Fig effect of the in. At the equilibrium point E2 on IC2 yields satisfaction to the worker obtained after reducing his income. From E3 on IC1 to his new equilibrium point E2 on IC2 convex to the,... To country the worker will work less as the wage rate are convex to the slope of the indifference.! Rate w0 ( i.e by compensating variation to start with at wage rate, you try AB is such obtained. And do not obtain utility just from products they purchase level of covered call option writing may vary on. Income line EK than MT has been given in Fig w1 in panel b! In addition, if income effect is as Some people, especially part-timers, react. Your browser we obtain that the supply of labour L1 is directly shown against wage rate w0 (.... Give up to compensate for 1 more hour if leisure the Firm, Chapter 27 you... Like 1 higher wages by working more the hours worked at the equilibrium point E2 on.! Not intersect thus, L1 number of work-hours supplied is shown against wage rate w0 in panel ( ).
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