Author Question: Most goods and service that we enjoy are bought and sold in the market. However, leisure is ... (Read 31 times)

kshipps · **on:** Jun 29, 2018

Most goods and service that we enjoy are bought and sold in the market. However, leisure is something that we value but we do not buy it explicitly.

What is the price of leisure? Explain what would happen to the amount of leisure that we would enjoy if the wage rate went up. Make sure to use the substitution and income effect to explain your answer and postulate whether leisure is a normal or inferior good. Why is the ultimate net effect not determinable by appealing to logic alone?

Question 2

What role do households play in output markets? What role do households play in factor markets?

What will be an ideal response?

Edwyer · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The price of leisure is the wage rate. When we enjoy leisure we are giving up wages that we could earn. If the wage rate went up there would be two possible effects. If leisure is a normal good the income effect would prompt us to consume more of it. At the same time there is an opposite force, which now makes work more attractive. The higher wage may prompt us to want to work more and we may substitute work for leisure. If leisure is an inferior good then the increased wage would prompt us to consume less leisure and more work. The substitution effect would still induce us to replace work for leisure. If leisure is a normal good the effect is ambiguous unless we know whether the income or substitution effect is stronger. If leisure is an inferior good then the net effect is clear. Higher wages will induce us to consume less of it and vice versa.

Answer to Question 2

Households are the buyers in output markets and are the sellers in factor markets.