05 labor supply Flashcards
(13 cards)
Topics of today class
-How do we model workers’ decisions on how much to work?
-What does this have to do with the consumer problem with an
endowment?
-What does the labor supply curve look like (as a function of wages)?
-How is this related to income and substitution effects?
-The Laffer curve — how does tax revenue depend on income taxation?
What is the consumer’s endowment?
Initial resources:
e1: Leisure (free) hours (e.g., 16 hrs/day).
e2: Initial money/consumption (e.g., 50 eur).
What are the variables?
x1: time for yourself
x2: stuff you buy n (≥ e2)
e1: endowment of time
e2: initial stuff (money)
p1: price of leisure (ücret).
p2 : price of consumption (often = 1)
L: Labor (e1-x1)
What is the budget constraint in a consumer problem with an endowment?
p1x1+p2x2 = p1e1+p2e2
the money she spends on good 2 (other
expenses) = (must equal) what she earns from selling good 1 (leisure).
How to calculate labor supply?
Hours worked: L = e1 - x1
Income earned: p1L = p1(e1-x1)
Example with numbers?
Let: e1 = 16 e2 = 50 p 1 = 20
p 2 =1.
If x1 = 10 hrs leisure:
Work: L = 16 − 10 = 6 hrs.
Income: 20 × 6 = 120 eur
Consumption: x2 = 50 + 120 = 170 eur Budget check: 0(10) + 1(170) = 20(16) + 1(50)
p1x1+p2x2 = p1e1+p2e2
boş zamanın parasal maliyeti + tüketim mallarına harcanan para = toplam zamanın parasal değeri + zaten sahip olunan tüketim mallarının parasal değeri
Budget Constraint of an Endowment-Based Consumer
The budget constraint is..
p1x1 + p2x2 = p1e1+p2e2
Consumer Problem with an Endowment
The consumer’s problem is to maximize utility subject to the budget constraint..
max x; u(x1,x2)
subject to; p1x1+p2x2 = p1e1+p2e2
What does
x1(p’1, p2, p’1· e1 + p2· e2) -
x1(p1, p2, p1· e1 + p2· e2) = ?
represent?
The change in demand for good x1, when its price rises from p1 to p’1 accounting for the endowment income effect.
How to calculate the gross demand and the net demand of a consumer problem with an endowment?
the gross demand (what the consumer consumes) for good 1 is:
x1 = x1(p1, p2, p1e1 + p2e2)
and the net demand (what the consumer additionally buys) is:
x1(p1, p2, p1e1 + p2e2) − e1.
net demand = gross demand - initial endowment
What is the difference between taxation and Tax Revenue?
Taxation (Tax Rate): the percentage of income/profits taken as tax (e.g., 20% income tax).
Tax Revenue: the actual money collected by the government (e.g., $1 billion from a 20% tax).
What is a Laffer Curve?
The Laffer Curve is a graphical representation of the relationship between taxation and tax revenues.
The term is used when revenues first increase and then decrease as a function of the tax rate. (inverse U-shape)
What is the main idea behind the Laffer Curve?
An increase in taxes has 2 effects:
- A larger portion of each worked hour’s earnings is collected by the
state.
-Taxes influence wages and, therefore, the number of hours worked.
