3 - Scarcity, work, and choice Flashcards
(29 cards)
How has annual hours worked changed as GDP per capita has changed?
As GDP per capita has increased, annual hours worked has fallen.
What assumptions can you make about people studying?
- For a given grade, an individual will prefer a combination with more free time to one with less
- If two combinations have the same free time, an individual prefers the one with the higher grade
What is an indifference curve?
A curve that joins all the combinations that provide equal utility.
Which indifference curve will an individual choose? Higher or lower?
Higher.
What is true about indifference curves?
- Slope downwards
- Higher ICs have higher utility levels
- ICs are usually smooth
- ICs do not cross
- As you move right along an IC, it becomes flatter
What is the MRS?
The amount of one good that a consumer is willing to trade for one unit of the other.
i.e. the slope of the IC
How does MRS change as you move along this red line?
MRS increases as you move up the curve.
The points you are willing to give up for an hours of extra free time increases.
When you have a lot of free time, you’re willing to lose an hour for a better grade.
How does MRS change as you move along this red line?
MRS decreases as you move to the right.
The points you are willing to give up for an extra hour of free time decreases.
When you have a low grade, you’re more willing to give up an hour of free time to improve your mark.
What is the feasible frontier?
The maximum quantity of one good for a given amount of another.
What is the feasible set?
All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces.
What does the feasible frontier show?
The marginal rate of transformation.
(the slope of the feasible frontier)
The quantity of some good that must be sacrificed to acquire one additional unit of another good.
Where is the highest possible utility achieved?
Where MRS = MRT
i.e. where the IC curve is tangential to the feasible frontier.
What does a technological improvement do to the feasible set?
Increases it.
What is the equation for budget constraint?
c=w(24-t)
c = consumption, w = wage, t = free time
What is the slope of the wage equation equal to?
MRT
How much free time you’re willing to lose in order to work for one more hour.
What is the optimal combination of consumption and free time?
MRS = MRT = w
What happens to MRS, MRT and budget constraint graph if your consumption is increased by £x?
Nothing. The opportunity cost of time is the same (w), the entire graph just shifts upwards.
What happens to MRS, MRT and budget constraint graph if your wage is increased by £x?
c = (w + x)(24 - t)
MRS increases (willing to sacrifice consumption for extra free time)
MRT increases (opportunity cost of free time is higher) - i.e. substitution effect
Graph rotates upwards.
What is the substitution effect?
When a good becomes more expensive relative to another, you choose to substitute away from the relatively more expensive good toward the relatively cheaper good.
Where is the substitution and income effects on the graph?
A => C (Income effect)
C => D (Substitution effect)
Explain the income effect on this graph.
The dotted line is the budget constraint that allows you to meet IC4 without any change in the opportunity cost of free time.
If this was the case, you would choose C, increasing your free time.
Explain the substitution effect on this graph.
As the budget constraint is made steeper by a higher MRT, causing the opportunity cost of free time to increase, you choose D rather than C.
What are the unrealistic aspects of this model?
- People don’t calculate MRS, MRT, budget constraints etc.
- Employers choose working hours, not employees
Draw a graph of overall effect (inc. / sub.) of free time per day from 1900 to 2020.
