Topic 1 Labor Supply

Question 1

What is labor supply about

Answer 1

Number of people choosing to be economically active/inactive - whether you supply yourself to labor market

Question 2

Explain the work-leisure model

Answer 2

Individuals choosing between work/leisure, and explaining the leisure/work combinations yielding same amount of total utility

Question 3

Draw a graph of indifference curve

Answer 3

Check notes

Question 4

Why does indifference curve have a negative slope

Answer 4

For more leisure, some income must be given up

Question 5

What happens when individual have low amounts of leisure

Answer 5

Willing to give up a large amount of income for 1h of leisure

Question 6

What happens if individual has high hours of leisure

Answer 6

Willing to give up a small amount of income for 1h of leisure

Question 7

What does the curves steepness represent?

Answer 7

The reluctancy to do the exchange of work and leisure

Question 8

What is marginal rate of substitution

Answer 8

MRS - amount of income one must give up to compensate for 1 more hours of leisure.

Question 9

What happens to MRS when you move down the indifference curve

Answer 9

It falls

Question 10

Why is there multiple indifference curves?

Answer 10

Individual seeks to attain the highest curve, which gives the most utility, i.e. Higher income and hours of leisure

Question 11

Explain workaholic

Answer 11

Values work, flat indifference curve, willing to give up a large amount of leisure for small increase in income. Must be given large increase in leisure to compensate small decrease in income

Question 12

Explain leisure lover

Answer 12

Values leisure, steep indifference curve. Willing to give up a large amount of income for a small little increase in leisure

Question 13

What is the most constraininng factor in the model

Answer 13

Wage - leading to utility maximization

Question 14

Explain budget constraint

Answer 14

Where The budget constraint tangent touches the highest attainable income indifference curve - with indifference curve shows combination of income and leisure a worker would get given at a wage rate. MRS equals to budget constraint!

Question 15

Draw and explain backwards bending labor supply curve

Answer 15

Check notes

Question 16

Explain income effect

Answer 16

As income raises the desire to work decreases as people want more leisure time to spend income

Question 17

Explain substitution effect

Answer 17

As wage raises the desire to work more hours raises. Substitute leisure for income higher wage rate increases the relative price of leisure

Question 18

Illustrate income and substitute effect on the budget constraint and indifference curve. Explain effects

Answer 18

Check notes

Question 19

What does the evidence state

Answer 19

Slightly more backwards bending for men, substitute effect create than income effect for women

Question 20

What does elasticity of labor supply measure?

Answer 20

The responsiveness of desired hours of work to wage rate - Formula if needed

Question 21

What happens with non-labor income to budget constraint

Answer 21

Budget constraint has a parallel shift. Lessens willingness to work & income effect occurs

Question 22

What are examples of nonlabor income

Answer 22

Rent payments, capital gains, investment profits, inheritance

Question 23

What makes an individual less likely to participate to labor market?

Answer 23

Steep indifference curve, high nonwage income & low wage rate

Question 24

What makes an individual likely to participate in the labor market

Answer 24

Higher wage rate, low nonwage income and flat indifference curve

Question 25

What is reservation wage?

Answer 25

The lowest wage necessary to induce someone to work

Question 26

Illustrate over and under employment, explain

Answer 26

Check notes