Sub: Economics Topic: Labour market
The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not forsubmitting the same in lieu of their academic submissions for grades.
The Supply of Labor
When we speak of a labor market, we are referring to the market for a specific occupation in a specificgeographical area. Consider the supply for nurses in the hypothetical city of Florence. The supply
question is” How
many hours of nursing services will be supplied at each
wage?” To answer that
question, we must think about how many nurses are in the city and how many hours each nurseworks. The decision to work is a decision to sacrifice some leisure time for money: Each hour of workreduces leisure time by one hour. Therefore, the demand for leisure is the flip side of the supply of labor. The price of leisure time is the income sacrificed for each hour of leisure, that is, the hourlywage. An increase in the price of a good has two effects: a substitution effect and an income effect.An increase in the wage the price of leisure has two effects on the demand for leisure
Substitution effect for leisure demand
. The worker faces a trade-off between leisure time andconsumer goods such as music, books, food, and entertainment. For each hour of leisure timeLeah takes, she loses one hour of work time, and her income drops by an amount equal to thewage. Therefore, she has less money to spend on consumer goods.
, if the wage is$8 per hour, each hour of leisure decreases the amount of income available to spend onconsumer goods by $8. When the wage increases to, say, $10, Leah will sacrifice more incomeand consumer goods for each hour of leisure she takes. Given the larger sacrifice of consumergoods per hour of leisure time, she will demand less leisure. That means she will work morehours and earn more money for consumer goods. In other words, as the wage increases, shewill substitute income and the consumer goods it buys for leisure time.
Income effect for leisure demand
. For most people, leisure is a normal good in the sense thatthe demand for leisure increases as real income increases. An increase in the wage increases