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

2. 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

3. 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

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

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

6. 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

7. Budget Constraint
Good Y
Good X

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

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

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

11. COMBINED INCOME
130
Market Goods
120
Home Goods

12. Percapita Consumption of Combined Household80
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

13. 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

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

15. If as a Household more Inclined towards Market goods80
Market Goods 65 50 30 60 90
Home Goods

16. If as a Household more Inclined towards Home goods80
Market Goods 65 50 30 60 90
Home Goods

17. If as a Household is somewhat indifferent between Market and Home goods80
Market Goods 65 50 30 60 90
Home Goods

18. 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

19. 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

20. 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

21. Indifference Curves in Labor Market
Good Y
Convex 16 16
Hours for NonMkt Time
Hours for Mkt Time

22. Budget Constraint Market Goods 190 150 B A 16 Hours for NonMkt Time16
Hours for NonMkt Time
Hours for Mkt Time 16

23. 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

24. 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

25. 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

26. 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

27. 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