The equilibrium consumption combination, Microeconomics

The Equilibrium Consumption Combination equilibrium for the person occurs at the point where the indifference curve, shown by II, is tangent to the budget line, portrayed by BB. This sets the marginal rate of substitution of consumption for leisure equal to the wage rate. Suppose the former was higher than the latter, as shown by the indicated by the star. By working one unit less the individual will give up w units of consumptions. His marginal rate of substitution is bigger than this number, implying that the person would be willing to give up more than w units of consumption to gain an extra unit of leisure. Hence, the individual should work less. By moving to the point indicated by the circle he would increase his utility. A point on a higher indifference curve would not be feasible. It would lie outside of the budget line. Therefore, is too expensive for the person. A point on a lower indifference curve would imply a lower level of utility.

1.1.4. The Impact of a Change in Wages. What happens when the wage rate, w, changes? Specifically, assume that it rises from w to w0. The situation is shown in Figure 2. The rise in the wage rate causes the budget constraint to rotate outward from BB to B0B. The persons equilibrium moves to the new point (l0; c0). In the situation portrayed, consumption rises while leisure falls. The impact of a wage increase on leisure is ambiguous in general, however.

To see this, the above move is broken down into two steps, as shown in Figure. Let the person labor at the new wage, w0, but reduce his endowment of time so that the new budget line passes through his old consumption/leisure point (l; c). In particular, you need to take away (w0 - w)(1 - l) in income or (w0 - w)(1 - l)=w0 in time. This leads to a parallel downward shift in the budget constraint from B0B0 to B00B00 that goes through the point (l; c). This is called a compensated shift in income. To prove that it goes through the point (l; c) note following the (negative) compensation the persons budget constraint is given by

c0 + w0l0 = w0 - (w0 - w)(1 - l):

It will be shown that the consumption point (l; c) satis.es this equation.

To see this, set c0 = c and l0 = l; that is, can the individual still buy

855_curve.png

Posted Date: 3/25/2013 6:36:08 AM | Location : United States







Related Discussions:- The equilibrium consumption combination, Assignment Help, Ask Question on The equilibrium consumption combination, Get Answer, Expert's Help, The equilibrium consumption combination Discussions

Write discussion on The equilibrium consumption combination
Your posts are moderated
Related Questions
I need help finding the future worth given the initial investment, MARR, and profit over a period of time.

Perfect competition and monopoly are rarely found in the real world and thus they do not represent, for the most part, the actual market situations. Therefore, the conclusions whic

A monopolist faces the following demand function for its product: Q = 45 - 5P The fixed costs of the monopolist are $12 and the variable costs are $5 per unit. a) What are the

Explain the key assumptions and desired properties commonly used economics. Economists generally make all or some of the given key assumptions and a condition while they study

discuss the revealed preference theory of consumer behaviour

Token Privatisation: This implies the sale of 5 per cent or 10 per cent shares of a profit-making public sector enterprise in the market with the objective of obtaining revenue t

identify which curve (demand or supply) will be affected?


Q. Explain Function of Central Bank? Central Bank: A public financial institution, generally established at the national level and controlled by a national government that sets

would a rational producer be concerned with the average or marginal product of an input in dec