Question

1) It is important to assume that leisure is a normal good? Explain why or why not.

2) Suppose that consumers pay tax on their wage income. First redraw the consumer's budget constraint considering this percent-tax. Then, show how this effects the labor supply curve.

3). What happens to the equilibrium level of labor after a decline in the level of technology?

4). Suppose the cost of renting capital increases(shown by an increase in r).

a) what happens to the amount of labor the firm chooses to maximize profits?

b) what happens to the equilibrium quantity of labor demanded and the equilibrium wage rate?

Answer 1

Questions 1 Ans :-

First of all, let us understand leisure what is it .

When dealing with labor supply, let’s look at one particular good: leisure.

Leisure is defined here as every hour not at your paid job, even if you spend it with your mother-in-law. Leisure is generally assumed to be a normal good. Richer people retire younger and vacation time increases as one’s income increases.

Now, let's look at what happens when your income increases. Two very important things happen that contradict each other: 1. Your demand for leisure increases, suggesting you will work less (income effect). 2 . The price of leisure, however, increases (since you're higher paid, each foregone hour is more expensive), suggesting you will work more (substitution effect).

An inferior good occurs when an increase in income causes a fall in demand. An inferior good has a negative income elasticity of demand. (YED) Inferior goods are characterised by low quality – and are goods with better alternatives.

For example, if average incomes rise 10%, and demand for holidays in Blackpool falls 2%. The YED of Blackpool holidays is -0.2. A holiday in Blackpool is an inferior good. When income rises, people can afford to forego the cheap alternative and buy the higher quality good instead. In this case, it is holidays abroad to Lanzarote.

For example, a person on low income may buy cheap gruel. But, when his income rises, he will afford better quality foods, such as fine bread and meat. Therefore, he stops buying gruel.

Importance of inferior goods
In a recession, with falling incomes, inferior goods can become in higher demand. Supermarkets may push these cheaper, value ‘inferior’ goods because there will be higher demand. Recessions can be good for Pound Shops, which concentrate on value goods. However, rising incomes can lead to falling demand for inferior goods and firms will increase the supply of the alternatives better quality goods.

Leisure is generally assumed to be a normal good. ... Your demand for leisure increases, suggesting you will work less (income effect). The price of leisure, however, increases (since you're higher paid, each foregone hour is more expensive), suggesting you will work more (substitution effect).