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Explaining a Firm's Demand for Labor
William L. Weber,
When discussing labor markets, I often illustrate how the efficient quantity of labor is determined by examining an apple orchard. The apple orchard owner combines land, capital (a barn) and labor (apple pickers) when harvesting apples. Students can easily see the law of diminishing returns: apples on trees close to the barn on low branches are picked first. Complement inputs such as a ladder and substitute inputs such as a machine which shakes the apple tree causing apples to fall into an inverted umbrella can also be easily introduced. In addition, the effects of externalities on wages and employment can also be introduced. For example, bees of a bee keeper located next to the apple orchard will cause greater flower pollination and increased productivity of workers, while the effect of acid rain may be to reduce yields of apple trees and the productivity of apple pickers.
Psychic Income in the Labor Market
Herbert M. Bernstein,
In the discussion over the labor market it is argued that people do not work exclusively for money; that jobs do contain degrees of psychic income. Therefore, the presence of psychic income implies that wage differentials, all other things being equal, will be greater given psychic income. In the following graphs we assume initially that jobs (a) and (b), which require commensurate skills, pay the same. If we now acknowledge the presence of psychic income in job (a) and its absence in job (b), the supply of labor in (a) will increase; the supply of labor in (b) will decrease resulting in a differential pay for (b) over (a). The overall implication is that the less important money becomes in the workplace, the greater likelihood of increased wage differentials.
Figure 28‑1
Benefits and Costs of Class Attendance
Eric Steger,
I explain to my students on the first day of class that I have an attendance policy. I explain that the benefit to them of never missing a class is a better education plus three points added to their final average grade. I explain that if a student misses my class six times an extra cost occurs. The student must compensate by doing an extra research paper entitled "The Causes, Costs and Curves of Employee Absenteeism." Typically, several students must write the paper but they learn that there are significant economic costs incurred in an economy when absenteeism exists.
Product and Resource Markets: Symmetry
David Weber, U.S. Coast Guard Academy
I find it useful to illustrate certain differences between price‑taking and price‑making buyers in resource markets by citing parallels with price‑taking and price‑making sellers in product markets. In a perfectly competitive product market, a firm confronts a horizontal demand schedule, indicative of the fact that regardless of how much of the product it offers to sell, the price that consumers will be willing to pay is not affected. As a result, the additional revenue it earns from the sale of a (any) marginal unit is equal to the full price of the product so that its marginal revenues and demand schedules coincide, as described in Figure 28‑2.
Figure 28‑2
Because a price‑maker in an imperfectly competitive product market confronts a down‑sloping demand schedule, variations in the amount it offers to sell will change the price consumers are willing to pay, and as a result, the additional revenue earned from the sale of a marginal unit (except for the first unit sold) will be less than the price received for it, so that firm's marginal revenue schedule will be below its demand schedule, as in Figure 28‑2.
In a perfectly competitive resource market, the assumption of price‑taking behavior on the buying side is captured graphically by confronting the firm with a horizontal resource supply schedule, which implies that the resource price is unaffected by how much of the resource the firm chooses to acquire. As a result, the additional cost the firm incurs when a marginal resource unit is acquired (i.e., the marginal resource cost) exactly equals the price of the resource, so that the supply schedule of the resource to the firm coincides with the firm's marginal resource cost schedule as in Figure 28‑3.
Figure 28‑3
Because a price‑making buyer in some imperfectly competitive resource market confronts a positively‑sloped resource supply schedule, variations in the amount of the resource it chooses to acquire will change the price resource supplies are willing to accept. As a result, the additional cost incurred when a marginal unit of some resource is acquired exceeds the price for which that unit is willing to make itself available (except for the first unit acquired), so that the firm's marginal resource cost schedule will be above its resource supply schedule as described in Figure 28‑3.
A simple numerical illustration reinforces the conclusions cited above. In Table 28‑1, two points on a price‑maker's down‑sloping demand schedule are described. The additional revenue earned from the sale of the marginal (seventh) unit is $2, which may be viewed as the difference between the price received for it ($8) and the $1 less it receives on each of the six non‑marginal units (compared to the per unit price of $9 it would have received for each of them if the price would not have dropped so as to permit the sale of the marginal unit.) (If the price associated with the quantity of seven units had remained the same; $9, as it does on a horizontal demand schedule, the marginal revenue earned from the sale of the seventh unit would be $9, the price received for selling it).
P XD
9 6
8 7
Table 28‑1
Similarly, Table 28‑2 describes two points on a price‑maker's up‑sloping resource supply schedule. The additional cost incurred from the acquisition of the marginal (seventh) unit of the resource is $15, which may be viewed as the sum of the price paid for it ($9) plus the $1 more the firm must pay for each of the six non‑marginal units (compared to the $8 per unit price it would have had to pay for each of them if the price would not have risen so as to permit the acquisition of the marginal unit.) (If the price associated with the quantity of seven units had remained the same, $8, as it does on a horizontal supply schedule, the marginal resource cost of acquiring the seventh unit would be $8, the price paid to acquire it.)
P XS
8 6
9 7
Table 28‑2
Marginal Productivity Theory of Wages in Aurelia
Walton Padelford,
Imagine the feudal kingdom of Aurelia with king, nobles, farmers, serfs. The agreement between King Gunnar and the people is that all the people in the kingdom will be defended and will have a weekly distribution of food in exchange for certain work days. Small children are seen in the kingdom of Aurelia working in the fields at very minor tasks; such as, picking up sticks, or pulling a few weeds by hand. Certainly, their addition to total production must be very low. However, the agreement is that everyone in the kingdom will eat, so any contribution to production increases the average consumption of everybody.
King Gunnar died, and his brother Bruno became king. He began paying wages for services rendered and attempted to make a profit on kingly enterprises. Children no longer showed up for work in the fields because the value of their produce, being 25 cents per day, was nowhere close to the daily wage rate of $5 which they would have to receive for daily service.
Resource Substitution Possibilities
Ali T. Akarca, University of
Illinois at
Even though students "learn" the isoquant‑isocost analysis of the behavior of the firm, they seldom apply it in their routine thinking. To bring this to the forefront and to emphasize the significance of substitution possibilities, I give my students the following exercise:
A firm produces 100 units of output using 50 hours of skilled labor and 100 hours of unskilled labor time together with its fixed inputs. If the price of unskilled labor increases by $1 per hour (say, due to an increase in the legal minimum wage rate), the firm's total cost of producing 100 units of output will increase by $100. Do you agree or disagree? Explain.
Most students agree with the statement given and dismiss it as too trivial. Only after seeing on a graph how through substitution the firm can cushion itself from the full potential impact of the input price increase, they learn to appreciate the relevance of the isoquant‑isocost analysis. After giving the correct answer to this exercise (the cost will increase but by less than $100), I ask the students why do they think that the unions, whose members are usually skilled laborers earning much higher wages than the legal minimum wage rate, bother to support raising the minimum wage rate. Because by then they have a graph in front of them showing the effect of the rise of the minimum wage to be an increase in the employment of skilled labor, most of the students give the correct answer. They also show signs of pleasure in gaining a new insight into an issue they had already given some thought. Indeed, I think that this analysis of minimum wage issue is more understandable to the students than the usual treatment involving separate demand‑supply analyses of skilled and unskilled labor markets.
Explaining Scale and Substitution Effects
Stephan F. Gohmann,
Students often find it difficult to understand the scale and substitution effects of a wage change. Instead of discussing labor and capital, I use an example of a bar which serves amongst other drinks, gin and tonic. I tell the students that they own the bar and currently sell their gin and tonics for a price of $2.00. At this price they sell 100 per day. The recipe is:
For
1 Drink For
100 Drinks
1
shot of gin 100
shots of gin
2
shots of tonic 200
shots of tonic
1
scoop of crushed ice. 100
scoops of ice.
I ask them what they would do if the price of a bottle of gin rises from $5 per fifth to $10 per fifth.
They'll say raise the price and water down the drinks. From these responses I can then explain the scale and substitution effects.
I ask what happens when they raise the price? We find that quantity demanded falls, say to 90. As a consequence we have scaled back production and the use of all inputs.
For 90 Drinks
90 shots of gin
180
shots of tonic
90 scoops of ice.
I then ask how they will water down the drinks. Generally they agree to change the recipe. To make the results interesting I choose:
For 1 Drink
1/2
shot of gin
2
1/8 shots of tonic
1
3/8 scoops of crushed ice.
This allows me to explain the substitution effect.
A final result is that for the 90 drinks we sell, we have the following quantities:
For 90 Drinks
45 shots of gin
191.25
shots of tonic
123.75
scoops of ice.
This result allows me to explain the concept of gross complements and gross substitutes.
Why Capital does not Cause Unemployment
Ray M. Johns, Hagerstown Jr. College
Many students are beguiled by the simple but erroneous logic that an increase in labor‑saving capital will cause unemployment. In macroeconomics, this misguided idea must be dealt with as a possible cause of structural unemployment. The subject can be introduced with an historical reference either to the Luddites who smashed textile machinery in England 1811‑1816 or to Marx' "industrial reserve army". The flaw in the simple logic of the Luddites was the assumption that labor‑saving capital won't change relative prices or incomes. In fact, as new technology increases physical productivity it can be expected to: (1) lower the price of the product creating new uses for it and increasing sales volume, (2) increase the incomes of the more productive workers creating a rise in demand for other products, (3) increase the real income of the product purchaser as the price falls creating increased demand for this product and other products, and (4) create jobs and incomes in industries producing the labor‑saving capital goods. As an example, AT&T in 1910 had 121,000 employees handling seven million calls (average 57 calls per employee). In 1981, they had 874,000 employees handling 219 billion calls (average 250,000 per employee). labor‑saving capital increased the demand for AT&T employees. Of course, the microeconomics explanation is that labor‑saving machinery shifts the VMP to the right and causes a higher level of employment.
Your Pet's Supply of "Labor"
By Ben Collier,
I have a young German shepherd who is very smart and has been able to learn commands given both verbally and with hand signals. But I find that when I show her that I have a doggie treat in my hand she is much more responsive to my commands (the benefits of obeying have increased), and when we go outside (she is an inside dog) she is much less responsive to my "come" command. This I attribute to the greater cost of obeying (the foregone opportunity to explore the outdoors). Not only does this serve as a good example of costs and benefits but it illustrates the methodological point that humans (or animals) need not be aware of economic theory or be "intelligent and calculating" for economics to predict behavior.
Josef M. Broder,
Job‑hunting is a most stressful experience for many graduating seniors. As faculty, we share some obligation to offer guidance and counseling to this group of future alumni. Since many of us lack job placement resources, our roles as advisors are perhaps best served by helping graduating seniors understand labor market behavior.
Invariably, we are asked to console students who are having trouble finding jobs or getting interviews. After receiving a series of rejections, students often question their self‑worth, as well as the value of their economics degrees. To console these students, I remind them that the value of labor depends upon how it's combined with other production resources. These relationships are readily shown with production functions.
Under competitive labor market conditions, workers are hired, among other reasons, if their marginal value product exceeds their wage rate. In a production function context, the marginal value product of labor declines to a level where additional hiring is unprofitable. The value of an individual's labor to an employer depends largely upon when he joins the company. At issue is not whether the skills and talents of graduating seniors are inferior to those in the labor market, but that inframarginal units of labor are paid more than marginal units. Hence, many rejection letters from would‑be employers are to be expected.
While theoretical advice may not substitute for gainful employment, such advice may lead to more productive job‑searching strategies. Students are advised to search for jobs for which they can effectively compete in industries which are actively hiring and with companies where they stand a reasonable chance of becoming an inframarginal employee.
“Wages Per Hour and College Basketball Players”
Eric Steger,
Recently, I noticed a basketball player in one of my classes seemed despondent and generally unlike himself. I asked him to see me after class. I inquired why he seemed so depressed and he told me that he was not getting to play in the games and was ashamed that he was "sitting on the bench". I told him that he was lucky compared to people playing because they all received the same nominal wage (tuition, fees, room and board paid through a scholarship) but he didn't have to exert himself and risk injury. In fact, I encouraged him to "loaf" as much as possible and just keep his scholarship because effort per dollar he received would be minimized. At first he protested and said my analysis was faulty but then he indicated I was making sense. I reminded him to perform, when asked, well enough to maintain his scholarship.
The Rate of Return to College Education
Robert J. Thornton, Lehigh University
Most courses in labor economics devote time to discussing the notion of human capital and the costs and returns of investing in human capital. Usually labor economics textbooks also summarize the empirical results of various studies which have attempted to measure the rate of return to a college education. The great majority of such studies, however, deal with the costs and returns of college graduates in the 1960s and 1970s. To give students a more current perspective on how their own investment in education may pay off, I employ the following exercise.
I first distribute to the class tables of recent income levels of college graduates and high school graduates for various age categories. The data are published annually by the U.S. Department of Commerce in its P‑60 series. (Additional data on college graduate earnings are also available from the College Placement Council of Bethlehem, PA. or even from the campus placement office.) From this data the students can calculate a rough estimate of the average yearly differential (D) between earnings of college graduates vs. earnings of high school graduates. I then ask the students to put together an estimate of how much their four years of college is costing them (C)‑‑tuition costs, various fees, and the income foregone by not working.
Using the data gathered in this fashion, the class can now calculate a rough estimate of the average rate of return (r) to a college education through the formula r = D/C. The formula is fairly well‑ known and is derived from the sum of a geometric progression. (The derivation of the formula may be a useful mathematical exercise in itself.) Of course, the appropriate cautions and limitations of the analysis should be made clear to the students. Strictly speaking, the formula is valid only for cases when the differential (D) between the earnings of college and high school graduates is constant over the worklife. (This assumption is more valid for the case of female college graduates than it is for male college graduates.) Nevertheless, the class exercise is useful both for producing rough estimates of the rate of return to college using current data and for generating discussion concerning the strengths and weaknesses of human capital analysis.
"You Just Can't Get Good Help Anymore"
Eric Steger,
To illustrate Law of Supply, I relate part of a conversation that I had with a local business person. This man complained that he had to work many "overtime" hours and he had to work his employees "way too many overtime hours." He said that "you just can't hire good help anymore." I asked him what salary range he was offering new college graduates? The salary figures he gave were appallingly low even in Oklahoma. I explained to the class that although a high beginning salary is not the only determinant of labor market choice, an "adequate" salary must exist or labor market "shortages" will persist.
Are English Professors Overpaid?
Barry P. Brownstein,
A hard notion to stamp out of principles students is the belief that there is an inherently fair price for a good or resource. Shock therapy can be the best method to stamp out these prejudices. Inform your class that the English faculty are grossly overpaid at your school. This is not your judgment but the judgment of the market. Since the supply of English professors greatly exceeds the demand, the market clearing price must be considerably below the going wage. An interesting discussion invariably arises when you point out that you are not judging the inherent worth of the English faculty, but are simply using market valuation. Are police and firemen underpaid? Then why is there a surplus of applicants? Is it fair that the author of a great scholarly work will probably get paid a lot less than the author of a romance novel? Eventually with enough examples the student will come to see that the only value‑free estimate of a "fair price" is the market price.
The Minimum Wage and Student Employment
Thomas J. Shea,
One of the arguments given by economists against the minimum wage is that it will hurt those it is really designed the help. Many of the arguments given about interfering with the workings of supply and demand are couched in this manner. Students seem to react to this argument negatively and are sincerely concerned with the plight of those working under a poverty level wage.
The best example I can give is for those universities that subsidize student aides. There is usually a budgeted amount of funds to be allocated according to need and the dictates of the financial aid system. However, it is explained that students can be made to realize, given a budgeted amount and a fixed wage that there are a certain number of hours of student labor that are funded. Now, ask them what would happen if a new, higher, wage as mandated by the federal government. It would mean less student labor hours available and, thus, some needy students left without a job and a means of financing their educations. This leads to many lively discussions of "need," other means of subsidizing students, and, eventually, what alternatives there are to a market solution to a difficult problem.
Example of a Price Floor: Comparable Worth
James A. Kurre, The
The concept of comparable worth has been much in the news lately, and has frequently received a sympathetic hearing because of the nature of its goal: halting or preventing wage discrimination based on gender. The argument stems from the basic idea that two people who do the same job should be paid the same wage, other things such as experience and skill level being equal. If a man and a woman are doing the same job yet the woman is being paid less, there is a prima facie case of sex discrimination.
Comparable worth extends that basic idea. What if the two people are not doing the same job, but jobs that are comparable in the sense that they require similar skills and responsibility? If one person were paid less, is that also necessarily a case of sex discrimination? The goal of comparable worth is to ensure that these people are paid the same regardless of gender. There is a basic flaw economic flaw in this idea, however. The comparable worth concept can be considered to be an attractively packaged price floor.
Consider the following case. Panel A of Figure 28‑4 shows the market for occupation A. Since demand is relatively low compared to the supply of people in this occupation, the wage level is W1. Panel B of the figure depicts the market for occupation B, in which the demand is relatively great compared to the supply, resulting in wage W2. These two occupations have "comparable" levels of skills and responsibility required. Under the doctrine of comparable worth, they should be paid the same amount. However, if the wage in A is raised to W2, there will be a surplus of workers in that occupation, the typical effect resulting from any price floor placed above the equilibrium price. If instead the wage in B is lowered somehow, a shortage will result in that occupation. If market A represents an occupation which is primarily populated by women, such as secretary, while occupation B is something like truck driving which is primarily done by men, we have the typical "comparable worth" case. Ironically, an effective comparable worth law would result in a decrease in the number of jobs in occupation A (a decrease in quantity demanded) at the same time that more people‑‑both men and women‑‑are attracted into that market by the now higher wage (an increase in quantity supplied). This stimulates competition for a smaller number of higher‑paying jobs‑‑hardly the intended goal.
Figure 28‑4
A good way to evaluate the idea of comparable worth is to divorce it from the emotion‑packed discrimination issue. What if occupation A were buggy‑whip braiding and occupation B were microcomputer assembly? Even if these two jobs require comparable levels of skill, a market system would yield low/falling wages in market A, with high/rising wages in market B, reflecting changing demands in the economy. A primary role of price in a free market economy is to provide information to producers participants about changing economic priorities. Locking price up with any effective floor or ceiling will prevent it from passing on such information, and will also give incorrect incentives for current and potential producers of these goods, resulting in a misallocation of resources.
Sol Kaufler,
In a singular effort to reverse historian Thomas Carlyle's dismal assessment of economics, I posed the problem to my students of constructing a model of the supply curve for models who might apply for the monthly centerfold position in Playboy magazine, and identifying the assumptions upon which their models were built. (No pun intended!) The collective insight of the class yielded essentially three contradictory views.
Figure 28-5
Model A: The Competitive Model (Panel A of Figure 28‑5.)
Assumptions:
a. Attractive models are basically a homogeneous labor resource (highly substitutable).
b. There is, therefore, a perfectly elastic supply curve over a large range of labor in the short‑run.
c. The price of the resource will equal competitive wages for comparable work.
d. The employer is known to seek special status for his product, so wage payments far above the competitive norm are a custom only, unneeded in the market for such labor.
Model B: Wages As Economic Rent (Panel B of Figure 28‑5)
Assumptions:
a. A particularly qualified model is a highly limited labor resource.
b. Supply is, therefore, perfectly inelastic in a given period.
c. The market price of the Playboy is purely demand determined.
d. The model selected might be regarded as the landlord of a strategic site; all payments received represent surpluses in excess of the actual supply price or opportunity cost.
Model C. Eclectic Views (Panel C of Figure 28‑5)
Assumptions:
a. Net advantages to the model selected as "Playmate of the Month" suggest a large supply of available models with varying financial expectations, present and future.
b. Some models, eager to capitalize on future job prospects, might be willing to pay for the unique opportunity; hence, a negative price might be established if quantity demanded were minuscule.
c. A number of models might be unwilling to pay for the opportunity but would forgo positive remuneration; hence, a zero price.
d. Many more models would be attracted to the particular job as the wage scale reached a competitive level equal to their opportunity costs.
e. Only in the long‑run would a higher than market rate be necessary to induce a particular model who might not otherwise be available for employment.
The class reached no conclusion, but the excitement of theorizing about markets was never in better evidence.
Herbert M. Bernstein,
The Cobweb Theorem that supply chases demand due to a gestation period of production, is usually presented in connection with agricultural activity. I have discovered that by utilizing the labor market in conjunction with a gestation period (time spent in college) students' attention is enhanced. In particular, if you use professions such as engineering and architecture, you can demonstrate that students, by relating to relative wages when they are freshmen, can precipitate excesses and deficiencies in supply as they respond disproportionately to the wages that exist when they initiate study, rather than to the expected demand upon commencement.
Wage Rate Differentials and Allocation
C. Richard Waits,
Students are handed an empty matrix in which the eleven rows are identified with different occupations and the nine columns are headed by different industry classifications. Students are asked to go through the help‑wanted ads of the Sunday newspaper to find salaries being offered in as many of the matrix elements as they can find. Then we discuss possible reasons for the differentials, illustrate the variations in demands for outputs and for various skills, and discuss the allocation by wage incentives in the various boxes in terms of taking workers (hours) away from one occupation/industry and setting those workers in another place in the matrix. The impact of these allocation on the locations of supply curves in each box can also be understood in terms of changing wage rates.
Comparing Competitive Product and Resource Markets
Ralph T. Byrns
Compare the assumptions of a competitive product market to the assumptions needed to generate a competitive labor market.
Product Market Labor Market
1. Large number of buyers 1. Large number of buyers
and sellers. and sellers.
2. Each agent is small 2. Each agent is small
relative to the market. relative to the market.
3. Homogeneous product. 3. Homogeneous workers.
The product of one firm is Each worker is a perfect
a perfect substitute for the substitute for any other
product of any other firm. worker.
4. The firm is a price taker. 4. The firm is a wage taker.
5. Free entry and exit. 5. Perfect labor mobility.
6. Perfect information. 6. Perfect information.
Students also gain by seeing the parallels between the output decisions of profit‑maximizing competitors and their decisions in labor markets. Just as the marginal output decision can be viewed as a balancing of marginal benefits to the competitive firm (the price received) and its marginal cost, you can treat the employment decision as a comparison between the benefits (MRP) and costs (w) of hiring an additional worker. Suggest that profit maximization in pure competition is consistent with hiring any workers who bring in more money than it costs to hire them. This approach lets students see quickly why VMP > MFC leads to the marginal worker being hired.
Ralph T. Byrns
Supporters of the 1986 tax reform and the 1981‑84 supply side tax cuts argued that cuts in marginal tax rates would increase the quantity of labor supplied. Discuss whether this assertion can be supported unambiguously by theory. (Answer: this is certain only if the substitution effect of an increase in the after‑tax wage exceeds the income effect.) Suggest to your students that a major effect of these cuts in marginal tax rates may be to encourage many wives of financially successful men to enter the work force. If a woman was the primary care provider while her children were young and her husband became very successful during the period when marginal tax rates rose to in excess of 50 percent (don't forget about Social Security Taxes), the wife who could secure only an entry level job often confronted potential total expenses from working (50+ percent marginal tax rate + extra transportation, clothing, eating out, etc.) that may have exceeded her potential income. Recent reductions in marginal tax rates may have offset this situation somewhat, stimulating a greater flow of housewives into the work force, and a swelling of the number of two‑earner families.
A related
point that you may want to raise with your students is the recent political
issue of "trickle‑down" economics. Use the tools presented in
the parallel chapter of our text to explain trickle down economics. Assume a
competitive labor market and a competitive product market. Show how P x MPPL
= W also implies that the real wage will equal the MPPL where
the real wage is W/P. Use an aggregate labor market model to show how increased
investment that increases labor productivity will increase the demand for
labor, increase employment and increase real wages. This sets the stage for all
kinds of interesting discussions.
The Slope of a Graph can have a Natural Economic Meaning
Mark E. Schaefer,
Ask students to give estimates of weekly take‑home pay as hours worked per week increases from ten to twenty on up to fifty. You plot hours on the horizontal axis on the board and take‑home pay on the vertical axis. Then ask them what the slope means. Give a hint by drawing a second steeper line and asking what happened to cause take‑home pay to be larger for the same hours worked. They will notice that the slope of the line connecting the dots can be thought of as the wage rate, which convinces them that the slope of a graph can have a natural economic meaning.
Your can press the story further by drawing a second graph directly under the first with the same hours worked marked on the horizontal axis but now with the wage rate on the vertical axis. Help them discover that a slope in the upper graph corresponds to a height in the lower graph and that the total area under the lower curve at, say, forty hours worked is the height of the upper curve at the same number of hours worked. Varying the height of the lower (wage) curve varies the steepness of the upper (pay) curve.
Indifference Curves and the Work‑Leisure Trade‑Off
Bienvenido S. Cortes,
A popular application of the indifference curve‑budget line analysis of consumer behavior is the allocation of time between work and leisure. The usual evaluation of the work vs. leisure choice would be to draw one consumer budget line connecting one extreme case where the person works all day and gets maximum payment of say, $A, and the opposite extreme where she doesn't work at all and therefore gets no pay. Consumer equilibrium is then reached at the point of tangency of the budget line and an indifference curve.
Instead of drawing only one budget line, we can make the analysis more realistic by delineating three budget lines for three types of workers: (1) a steeper AD represents workaholics or over‑achievers who prefer to work more and thus get paid more; (2) a flatter FD represents bums or independently wealthy individuals who work much fewer hours than workaholics and thus get paid less, and; (3) a vertical BG represents me with a fixed income or salary, $I. The relevant budget line would then become ABCD. My utility is indicated by indifference curves U and U' (the workaholic's set of indifference curves would reflect greater preference for work and income and, thus, would be located more to the left of my, or a bum's utility map). I maximize my utility at point B with 8 hours of work per day at $I an hour and 16 hours of leisure (sleeping, eating, playing tennis, etc.). However, my preference or where I want to be is not necessarily the same as my optimal position. I want to have more leisure hours with the sacrifice of some $ (point E). Emphasize the notion that you can't have your cake and eat it too since at point E, I can't be paid a workaholic's income and still enjoy extra time for just "bumming around." Another way of showing this analysis is by treating it as a linear programming application where the area under ABCD is the feasible region and B the optimal solution.
Figure 28‑6