Allocation Between the Household and the Labor Market

1
Allocation Between the Household and the Labor
Market

• The Indifference Curve
• Substitution in Consumption vs. Production

2
Rational Consumer

• Notation
• 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
• 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
Concave
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 Household
80
Consumption area improved by joining households
Market Goods
65
50
Areas that are lost by joining households and
consuming in equal parts
90
30
60
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
goods
80
Market Goods
65
50
90
30
60
Home Goods
16
If as a Household more Inclined towards Home goods
80
Market Goods
65
50
90
30
60
Home Goods
17
If as a Household is somewhat indifferent between
Market and Home goods
80
Market Goods
65
50
90
30
60
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 0
0 16
Hours for NonMkt Time Hours for Mkt Time
22
Budget Constraint
Market Goods
190
150
B
A
0 16
Hours for NonMkt Time Hours for Mkt Time
16 0
23
Reservation Wage
Market Goods
So at a wage of 12 an hour this individual would
work 8 hours
192
96
B
A
8 8
0 16
Hours for NonMkt Time Hours for Mkt Time
16 0
24
Reservation Wage
Market Goods
So at a wage of 12 an hour this individual would
not work
192
96
B
A
8 8
0 16
Hours for NonMkt Time Hours for Mkt Time
16 0
25
Reservation Wage
Market Goods
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 8
0 16
Hours for NonMkt Time Hours for Mkt Time
16 0
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 8
0 16
Hours for NonMkt Time Hours for Mkt Time
16 0
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 8
0 16
Hours for NonMkt Time Hours for Mkt Time
16 0