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ILRLE 2400 Lecture Notes - Lecture 6: Normal Good

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orchidjackal488
27 Sep 2016
School
Cornell University
Department
ILR Labor Economics
Course
ILRLE 2400
Professor
Robert S.Smith

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Document Summary

Choice in life (16 hours, generally): can either work for pay or spend time as leisure. Demand for leisure (dl, equal to the supply of labor) is a function of: Wage is defined as delta income / delta hours worked. So, if someone wins a lottery ticket: Their income goes up but their wage stays the same. Someone who made an hour is still only worth an hour. Income effect (always negative): delta hours worked / delta income, wages held constant. Winning the lottery is a perfect example of this. Person will work less as leisure is a normal good. Conversely, if income goes down, person will work more. Not to be confused to the other substitution effect - related but not the same. Suppose the wage changes but nothing else does. Delta hours worked / delta wage rate holding income constant. If wage goes up, price of leisure goes up.

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Related Questions

In 1981 Andrew Carnegie asserted that "parents who leave their children enormous wealth generally deaden their children's talents and energies and tempt them to lead less productive lives."

A.) Evaluate this statement using the labor-leisure model and explain the effects of such inheritances on hours of work and leisure.

B.) Some parents may link the inheritances to the actual amount earned by their children in the labor market. That is, the children can claim the inheritance only if their labor earnings exceed $50,000 per year. However, if their labor compensation is more than $150,000 per year the inheritance will be given to charity. Draw the budget constraint under the earnings-conditioned inheritance (scenario II).

C.) Now assume that the parents are interested in the amount of time their children spend in the labor market. Under this scenario, the children will receive double the market wage rate if they work at least 25 hours per week, three times the market wage if they work between 30 hours and up to 45 hours per week, and only the market wage for any additional hour worked. Draw the budget constraint under the hours-of-work condictioned inheritance (scenario III).

D.) Compare the welfare of the children when there is no inheritance whatsoever (scenario I) and under the two alternative scenarios (scenario II, scenario III). Are the children better off? Are any worse off? Explain.

[Note: For all the previous parts (a)-(d) assume that there is both a labor and a non-labor income component.]