Slide #1.

L9 Application 1: Labor supply
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Slide #2.

Review   Model of choice We know preferences we find and p1 , p 2 ,   The two differences – net demands  Buying, selling?
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Slide #3.

Geometry x2  p1 slope  p2    1 ,  2    x1
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Slide #4.

Three Applications 1. Labor Supply (Labor-Leisure Choice) 2. Intertemporal Choice (Consumption-Savings Choice) 3. Uncertainty (Insurance) (Consumption across states of the world)
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Slide #5.

Labor Supply Model (One day)  Two “goods”: leisure time, R, and consumption, C A worker is endowed with time 24h  Consumption good’s price is pc.  w is the wage rate in $  New: Labor supply 
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Slide #6.

Translation:
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Slide #7.

Budget set  The worker’s budget constraint is p cC  w (2 4  R )  where C, R denote gross demands for the consumption good and for leisure. This can be rewritten as w R  p cC  2 4 w
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Slide #8.

Budget set C w  pc  R
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Slide #9.

Budget set C w  pc  R
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Slide #10.

Quiz: Real Price 1. 2. Budget set depends on wage and price only through ratio Ratio is called a real wage rate Q: Real wage rate is a “price” of A) time in terms of $ B) time in terms of commodity C) commodity in terms of $ D) commodity in terms of time
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Slide #11.

Preferences C  R
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Slide #12.

Labor supply Curve: Definition C  R
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Slide #13.

Cobb Douglass: Optimal Choice   ( 2 4 ,0 )
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Slide #14.

Cobb Douglass: Labor Supply p c 1 C  R
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Slide #15.

Cobb Douglass: Labor supply   ( 2 4 ,0 ) L
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Slide #16.

Empirical Evidence: Inelastic Backward-Bending Labor supply
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Slide #17.

Solution: overtime wage 2. First 8 hours of work: w The following hours: w’>w 3. w’ is an overtime wage rate 1.
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Slide #18.

Overtime wage rate: Budget set
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