L9

1
L9

• Application 1 Labor supply

2
Review

• Model of choice
• We know preferences and
• we find
• The two differences net demands
• Buying, selling?

3
Geometry

x2
w2
w1
x1
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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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Labor Supply Model (One day)

• Two goods leisure time, R,
• and consumption, C
• A worker is endowed with time 24h
• Consumption goods price is pc.
• w is the wage rate in
• New Labor supply

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Translation
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Labor Supply

• The workers budget constraint iswhere C, R
  denote gross demands for the consumption good and
  for leisure.
• This can be rewritten as

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Budget set
C
24
R
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Budget set
C
24
R
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Real Price

• Budget set depends on wage and price only through
  ratio
• Real wage, is a relative price
• of time in terms of commodity

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Labor supply Curve Definition
C
R
24
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Cobb Douglass Optimal Choice
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Cobb Douglass Labor Supply
C
R
24
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Cobb Douglass Labor supply
L
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Empirical Estimates

Inelastic Backward-Bending Labor supply
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Solution overtime wage

• First 8 hours of work w
• The following hours wgtw
• w is an overtime wage rate

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Overtime wage rate Budget set