Question

Question

Explain the following statement within the framework of the basic work– leisure model of labour supply (define key concepts used in your discussion; assume leisure is a normal good):

When Karla’s wage rate decreased she responded by working more hours than before.

Answer 1

In the labor- leisure model is based on the assumptions that individual choose between work and leisure. Work is the time spend on a job that pays and on other hand leisure is the time spend on enjoyment.

Indifference Curve: This is the curve drawn on the two factors - Income earned and the time spend on leisure. As the time spent on leisure increases the income decreases.

Budget constraints: This shows the combination of leisure and income that labour could get from the given wage rate. As the wage rate increases the income earned on the same work hour increases and vice versa.

Underemployed.

The worker would choose to work more than the standard work hour because she feels it is more beneficial than doing nothing. This is the case when the work hours is more and the wage rate is less.