Allocation Between the Household and the Labor Market The Indifference Curve Substitution in Consumption vs. Production

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

Rational Consumer Rule 2- Transitivity Rule 3- Completeness 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 Good Y .D .C .B .A Good X

Indifference Curve Good Y .D .C .B .A Good X

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 Good Y Good X

Convex vs. Concave Indifference Curves Good Y .B .A .C Good X

Maximize Utility Good Y .A Convex .C .B Good X

TWO SEPARATE HOUSEHOLDS Significant A Significant B 80 50 Market Goods Market Goods 90 30 Home Goods Home Goods

COMBINED INCOME 130 Market Goods 120 Home Goods

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? 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 HOUSEHOLDS Significant A Significant B 80 50 Market Goods Market Goods 90 30 Home Goods Home Goods

If as a Household more Inclined towards Market goods 80 Market Goods 65 50 30 60 90 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 80 Market Goods 65 50 30 60 90 Home Goods

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

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 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 Market Good Y Convex 16 16 Hours for NonMkt Time Hours for Mkt Time

Budget Constraint Market Goods 190 150 B A 16 Hours for NonMkt Time 16 Hours for NonMkt Time Hours for Mkt Time 16

this individual would work Reservation Wage Market Goods So at a wage of $12 an hour this individual would work 8 hours 192 96 B A 8 16 Hours for NonMkt Time Hours for Mkt Time 16

Reservation Wage Market Goods So at a wage of $12 an hour this individual would not work 192 96 B A 8 16 Hours for NonMkt Time Hours for Mkt Time 16

Reservation Wage Market Goods 1 192 96 B 2 A 8 16 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 16 Hours for NonMkt Time Hours for Mkt Time 16

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 16 Hours for NonMkt Time Hours for Mkt Time 16

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 16 Hours for NonMkt Time Hours for Mkt Time 16