Household behaviour and consumer choice

4 important questions on Household behaviour and consumer choice

What is marginal utlility (MU)?

The additional satisfaction gained by consumption of one more unit (last unit). When the marginal utility is 0, the total utility stops.

On what does the labor supply decision depend?

- Availability of jobs
- Market wage rates
- Skills they possess
- Time limitation

= As with decisions in output markets, the labor supply decision involves a set of trade-offs

What is the price of Leisure?

The decision to enter the workforce involves a trade-off between wages (and the goods and services that wages will buy) on the one hand and leisure and the value of nonmarket production on the other hand.
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What is the difference between income and substitution effects?

- Higher interest rate -> “price” of spending today is higher (each dollar I spend today cost me more in terms of future consumption because my saving will now earn a higher return) -> save more = SUBSTITUTION EFFECT

- Higher interest rate -> it takes less saving today to reach a specific target of savings tomorrow -> save less = INCOME EFFECT

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