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Labor Economics Test #2 Labor Supply
Terms in this set (17)
Preferences are complete
If consumer has 2 goods, they can say which one is better
Preferences are transitive
If consumer likes A>B, B>C, then he like A>C
The measure of consumer satisfaction
The measure of overall utility of all goods consumed
Amount of utility you get from each additional good consumed.
Tu = total utility
X = consumption
Diminishing Marginal Utility
The more you consume, the less utility you can from consuming the good.
Marginal Rate of Substituion
Is the slope of an indifference curve. Marginal utility of one good divided by the marginal utility of another good. - The willingness of the consumer to give away good Y in exchange for good X.
What do steeper/flatter indifference curves mean if good A is on the Y axis and good B is on the X axis.
1. Steeper Slope- Rather B than A
2. Flatter Slope- Rather A than B
Two Stipulations about indifference curves
(Essentially meaning the same thing)
1. They cannot cross
2. They must be parallel
Constraints to buying goods
Incomes > p1A + p2B
Cost of an alternate that must be forgone in order to pursue a certain action
Substitution Effect in terms of goods
Holding utility constant, consumers consume more of goods when relative prices falls.
Holding utility constant, consumers consume less of goods when relative prices rise.
Income Effect in terms of goods
Assuming goods are normal and holding relative prices constant, if income increases, you're going to consume more goods.
When the budget constraint intersects the indifference curve at the X axis.
MRS > Px/Py.
MuX/Px > MuY/Py
As relative price of leisure rises, L↓/W↑
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