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EC 444 - Essay Example

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EC 444

When income becomes scarce, the curve flattens.
The third property is indifference map which reflects different levels of utility. An individual will attain maximum total utility on the highest position of the indifference curve. The fourth property is work-leisure preference of the individual. The shape of the curve is determined by individual’s preferences, occupation, and personal circumstances. A flat curve reflects a person with an occupying job. A nursing mother will have a relatively steep indifference curve because much of her time is spent on non-labor market activities.
An individual’s budget is controlled by the amount of wages earned. Budget constraint is reflected by the wages earned and this has an overall effect on the shape of the indifference curve. Individual’s maximum utility is attainable at the highest position on the indifference curve.
Changes in wage rates have an effect on the number of working hours. An increase in the number of working hours increases the wage rate but with time wage increase may reduce the number of working hours. Wage rate is affected by income and substitution effects. Income effect results from the change in the desired number of working hours as a result of income change, wages are kept constant. An increase in income means more money will be available to spend on purchasing leisure. The resulting effect is the reduction of desired number of working hours.
Substitution effect results from the change in the desired number of working hours as a result changes in wage rate, income is kept constant. When leisure becomes expensive, it is sensible for the individual to work more hours and reduce time spend on leisure. The resulting effect is increase in the number of working hours. The overall net effect will depend on the magnitude of income and substitution effect.
Women are responsive to changes in wage rates than men. This is due to the differences in allocation of time. Men use their time ...Show more

Summary

An indifference curve shows the relationship between real income and leisure time and combinations that result to satisfaction of the individual…
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EC 444 essay example
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