ECO101H1 Chapter Notes - Chapter 2: Negative Income Tax, Household Income, Earned Income Tax Credit

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ECO101H1 Full Course Notes
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ECO101H1 Full Course Notes
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A worker will either work all available time or will not work at all. As drawn in figure a, point b is preferred to points a and c. thus, the worker chooses not to enter the labor market. B, point c is preferred to both points a and b. Thus, the worker chooses not to consume any leisure and work all available time. Thus, her endowment point has moved from e to e in figure a. As long as leisure is a normal good, the indifference curve is steeper as we move up a vertical line, indicating that the slope of the indifference curve is steeper at e than at e . Thus, an increase in the price of goods lowers the reservation wage and makes the person more likely to work. To simplify the illustration of the effect on hours of work, assume for simplicity that v = 0.

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