Question

1. What happens to the budget constraint if nonlabor income increases? Show graphically.

2. What are the effects of a nonlabor income on leisure, and market work?

3. What are the three effects that result from the change in wage?

4. What are the effects of a wage increase?

5. What are the deficiencies of the simple labor leisure model?

Answer 1

(1) When non labour income rises, budget constraint shifts rightward like this from AB to A'B'.
Income A Labour esure

(2) You can see from the above diagram that as non labour income rises, leisure rises and labour hours falls.

(3)
Subatatulon offect 6 A Hat Tmone Houss of Labaus

(4) As income rises in initial phase, people tend to work more and work for increasing the wage, income effect. When income rises further labour supply curve becomes steep and only wages rises where labour hours does not rise. When wages rises further, hours of labour declines which is substitution effect.

(5) Weaknesses in Leisure labour model

• It takes into account the assumption that every individual work less when the income level rises further but there are some cases when people tend to work more when income rises. For them income effect is always there.
• Leisure we assumes is normal good while it cannot be in some conditions. A good is a normal good when increases in income, holding the prices of all goods constant, increase its consumption. A good is an inferior good when increases in income, holding prices constant, decrease its consumption. Leisure could be a normal good or an inferior good