Question

4. Use the model of labor supply that includes indifference curves and budget constraints to analyze the labor force participation behavior of a nonwealthy labor market participant who just married a wealthy partner.

a. Use the model to discuss under what conditions s/he will exit the labor force.

b. Discuss (and demonstrate) how the indifference curve may be shaped such that the newlywed keeps working (hint: is the curve steep or flat and what does that mean?)

c. Discuss (and demonstrate) how the indifference curve may be shaped such that the newlywed exits the labor force (hint: is the curve steep or flat and what does that mean?)

Answer 1

Marrying a wealthy partner could be be just seen as increase in wage.

a) He will exit the market when income effect > substitution effect.

b) If he keeps working , that implies substitution effect > income effect , that is higher wages allows him to work more in order to gain to more wealth , ie oppurtunity costs of not working is too high,

It will be a positive slope labor supply curve.

c) Now , the curve will be backword bending ie when wages exceed certain level , people substitute work for lesiure.