Labor Supply

While the preceding elements tested tradeoffs in choices of bundles with different goods, services (in Deriving Demand and over lotteries in Dynamic Consumption Decisions), often agents need to make a choice trading off between leisure and consumption. The elements in this module test an agent's ability to optimally make that tradeoff by balancing the consumption goods required to compensate for decreased leisure—which leads to the labor supply elasticity central to many branches of economics. Since goods must be purchased, agents will consider the relative wage from additional work compared to the price of goods. This leads us to be able to test an agent's ability to distinguish real from nominal prices.

Elements

1. Deriving Labor Supply

   Deriving optimal hours of work from a Cobb-Douglas utility over consumption and leisure.

2. Labor Supply Elasticity

   Using a labor supply elasticity to translate a wage change into an hours change, or the reverse.

3. Marginal Rate of Substitution in Labor Supply

   Computing the marginal rate of substitution of leisure for consumption, and comparing it with the real wage to decide whether to work more or fewer hours.