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Final exam！

This exam is about the major of Economics, and the course is Economics of the Family. This lesson is mainly An introduction to the theoretical and empirical literature on the allocation of labour and resources within households, and its relation to labour force outcomes. Topics may include human capital decisions; gender roles; household production; labour force participation; the economics of marriage and divorce; the valuation of unpaid work in national income accounting; child care; gender and development.

There are a total of three questions in this exam. Only need to do 2 questions, but the answers need to be very comprehensive. You need to write down all the factors, and the calculation part must be clearly expressed, that is, the question and the write all relevant answers!

Remember, answer the questions comprehensively!!

Individual allocation of time between leisure and market labour

I Notation for leisure – market labour tradeoff
Total time = T
Time taken as leisure = l
Time spent in market labour = T – l, market wage rate per unit of time = w
Leisure is a “good”, market labour is a bad.
Why spend time in market labour? To acquire income to purchase market-produced goods, C, with price per unit = p
Opportunity cost of a unit of leisure, in terms of market-produced good?
Quantity of C must be given up to obtain one more unit of leisure is w/p
Monetary cost of reducing market labour by one unit is w.
Amount of C that can be purchased by one unit of market labour = w/p

II Numerical example
Consider time measured in hours
Let T = 16 per day w = $20 per hour p = $10
Then if all time spent in market labour income = $320; this can be used to purchase C = 32
Opportunity cost of a unit of leisure = $20/$10 = 2 units of C

NOTE: scale on vertical axis is adjusted to make change in constraint more clear.
C
32
slope = -2 A: on initial budget line where MRS of C for l = -2

B: on budget line after wage decrease where MRS of C for l =
new “real price” of unit of leisure = -15/10 = -3/2
A (initial choice)
D D: substitution effect of decrease in wage rate on indifference curve through A where
B MRS of C for A =-3/2
(choice after w )
Leisure in hours
l at A 16
(total time T)
Lower intercept on vertical axis = 240, reflects 25% decrease in market wage.

Effects of decline in wage rate
Suppose now that w falls from $20/hr to $15/hr.
This will not affect the maximum time available for leisure (16 hrs), but will reduce the maximum income if all time is spent in market labour: spending all 16 hrs in the market will now generate 25% less income, so wT = 16×15 = 240 rather than 320.
Substitution effect: Move from A-D means l increases and C decreases
Income effect: move from D-B means both l and C decrease.
Overall effect on market labour? Given preferences, income effect is larger (in absolute value) than Substitution effect, so leisure falls and market labour increases. With different preferences, could have increased.

Page 1 of 2

University of Victoria

Economics 339 202009

Midterm answer key: written response questions

Question 4

Ember (E) and Rajan (R) are a couple with individual productivities in both the market and their home. Each has 10 hours per day to devote to work. E can earn $9 per hour in the market, and can produce goods worth $8 per hour at home. R can earn $12 per hour in the market, and can produce goods worth $6 per hour at home.

Market-produced goods cost $5 per unit.

Who has the higher opportunity cost of home production? Briefly explain how you determined this.

_____________

______________

Note: the wording is more confusing than intended. I will accept a couple of answers.

Answer: Opportunity cost of household production can be measured in two ways: using monetary values or quantities of good. Information in question gives hourly wage for market work, and “shadow wage” for household production.

1. Using hourly compensation in both production settings: if E switches one hour from market labour to household labour, the couple loses $9 worth of market produced goods and gains $8 worth of home-produced goods. This means the opportunity cost of an hour of household production = $9/$8 =9/8. Following the same reasoning, the opportunity cost of an hour of household production for R = $12/$6 = 2. Since 2 >9/8, R has the higher opportunity cost.

Marks: 2 for explicit statement of what is being used to calculate opportunity cost, 2 for reasoning behind this use, and 2 for showing and stating that R’s opportunity cost of household production is greater than E’s

Score

Question 5

Suppose Ember and Rajan choose to divide their time so that Rajan works part time in the market and part time at home, while Ember works full time in the market.

Is this division of time efficient? Briefly explain why or why not.

______________________________

Answer: No, this allocation of time is not efficient. (2 points)

If E works full time in the market and R works part-time at home, then the couple’s opportunity cost of an additional unit of market produced goods is equal to R’s opportunity cost of market produced goods measured, by the amount of household goods R does not produce with the reallocated labour. This is less than E’s opportunity cost for market goods in terms of home produced goods. If the couple switched time allocations, so R worked full time in the market and E worked part time in the market and part time at home, the couple would be able to consume more of both goods.

This means that with the same resources the couple could increase the amount of consumption of both market and home produced goods, so the original allocation of time is not efficient.

4 points for an explanation of how consumption of both types of goods could be increased.

2 marks for stating that if it is possible for the couple to produce more of both typed of goods with the same resources then the initial time allocation cannot be efficient.

Note: the wording of a student’s answer will almost certainly not match mine, but they should have full marks if they get the main ideas across clearly.

Score

Question 6

If the couple chose to consume more home produced goods than either Ember or Rajan could produce alone, and the couple wanted to maximize their joint utility, which partner would produce market goods? Briefly explain why.

Note: you do not have enough information to provide a numerical answer.

Answer: R would produce market goods. E is more efficient working at home than in the market, compared to R.
Therefore the amount of household goods that can be produced by the couple with only one person working at home is the max E can produce.
If the couple chooses to consume more than E can produce alone, then R should shift some time from market labour to home production. So R would work part time in the market and part time at home.

Question 7

What is the slope of the couple’s joint production possibility frontier (ppf)?

What changes at the kink in the joint ppf?

_____________

Answer: The couple’s joint ppf is piece-wise linear; there is a single kink. Above the kink the slope of the ppf is equal to the slope of E’s individual ppf. Below the kink the slope is equal to the slope of R’s individual ppf.
At the kink, both individuals are working full time in the sphere in which they have the comparative advantage: in this case, R in the market and E at home. Moving along the ppf away from the kink in either direction has one person working part time in the market and part time at home while the other keeps working full time in the area in which they have the comparative advantage.
Therefore the changes at the kink are a reallocation some of one person’s labour away from complete specialization in the area in which the have the comparative advantage to part-time work in both areas.
Marks: 3 for the slope and 3 for the changes.
Slope can be identified by value of opportunity cost (answer in Q4) or as I did – saying whose opportunity cost is relevant without stating its value.
Changes at the kink are time reallocations – one person splits their time between home and the market. Students do not need to specify who divides their time on which portion of the ppf.

Score

Question 8

Suppose Ember and Rajan together initially chose a bundle of the two types of goods requiring Ember to work part time in both the market and their home. One effect of the COVID-19 lockdown was that Ember’s return from market labour was reduced to $7 per hour, or $70 per day. Nothing else changed.

Given their initial choice, how would you expect the allocation of the couple’s labour to change as a result of this? Explain this, using income and substitution effects.

Answer: This decrease in E’s hourly market wage, all else equal, has two effects:
1. Substitution effect: E’s opportunity cost of household labour would be lower than it was before. If E is currently dividing their time between market and household labour while R works full time in the market, the couple’s opportunity cost of household production = E’s opportunity cost. All else equal, including the initial level of utility (staying on the same indifference curve), this would induce an increase in consumption of household goods (and decreased consumption of market goods) for the couple. The only way to increase the production of household goods is to shift some of the couple’s labour from the market to the household, and it is efficient to reallocate E’s time.
2. Income effect: the maximum amount of market production obtainable by R working full time in the market while E splits her time is now less than it was before. If both market and household produced goods are normal goods, then this decrease in potential income would lead to a reduced consumption of both home and market produced goods. Given the initial time allocation, the only way to reduce home production is for E to switch time from home to the market.

The combined income and substitution effects lead to a decrease in the amount of market produced goods the couple would choose to consume. The overall effect on home produced goods is ambiguous, since the substitution and income effects are of opposite signs. The decrease in the amount of market goods consumed does not indicate a definite reallocation of E’s time, because this can be accomplished by not changing the current time allocation, decreasing the amount of time E spends in the market, or even increasing E’s market labour a bit.
Marking scheme: 2.5 points for a clear explanation of income effects, and 2.5 for a clear explanation of substitution effects, on the bundle of home and market produced goods.
3 points for a discussion of the consequences for time allocation.

Score

Expand question feedback: many students assumed that since Ember’s market productivity declined,

the couple would choose to have Ember devote more time to market work (and therefore less to homework)

to make up the lost income. This might be true, but it is not the only possible outcome. The substitution and

income effects on the household’s consumption of home produced work in opposite directions; they work in

the same direction on market produced goods. This means that the quantity of market goods unambiguously

decreases. This will happen if the productivity change leads to no change in E’s market labour.

Question 9

One widely observed practice after the COVID-19 lockdown was an increase in homemade bread. Flour, butter and sugar were difficult to find, and when they were available in grocery stores there were limits on the amounts any person could purchase at one time.

How might you explain this, using the information above?

______________

Note: there was a glitch in presenting the information for this question (mine? Brightspace?) Questions 4-9 were all to be based on the information in Q4-Q9. Even without this statement, it is reasonable to expect students to answer this in the context of the material covered in the course. For this question, this would be an increase in home production.

Answer: This question will be marked out of 5, and students will receive 4/5 for a reasonable discussion of this situation in terms of supply and demand.)
During the initial COVID-19 lockdown, many people were left with either reduced work hours or unemployment. Several people switched at least part of this additional time to home production. Homemade bread was one of the products of this switch. People were also encouraged to make fewer shopping trips per week.
People stocked up on the ingredients needed to make bread, leading to an increase in demand for these ingredients. Maintaining a supply adequate for the jump in demand was difficult for most grocery stores/chains – because of both layoffs and social distancing, fewer workers were available to work and transportation networks were slowed down (ferry crossings reduced…). One common mechanism for alleviating the upward pressure on prices was to ration amounts purchased by any one household.

Score

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1

of
1

University of Victoria

Economics 339 202009

Midterm
answer

key
: w
ritten response questions

Question 4

Ember (E) and Rajan

(R) are a couple with individual productivities in both the market and their
home.

Each has 10 hours per day to devote to work. E can earn $9 per hour in the market, and
can produce goods worth $8 per hour at home. R can earn $12 per hour in the market,
and can
produce goods worth $6 per hour at home.

Market
–
produced goods cost $5 per unit.

Who has the higher opportunity cost of home production? Briefly explain how you determined
this.

_____________________________

Note:
the wording is more confusing than intended. I will accept a
couple of answers.

Answer
:
Opportunity cost of household production can be measured in two ways: using
monetary values or quantities of good. Information in question gives hourly wage for market
work, and “shadow wage” for household production.

U
sing hourly co
mpensation in both production settings: if E switches one hour from market
labour to household labour, the couple loses $9 worth of market produced goods and gain
s

$8
worth of home
–
produced goods.

This means the opportunity cost of an hour of household
pro
duction = $9/$8 =9/8. Following the same reasoning, the opportunity cost of an hour of
household production for

R = $12/$6 = 2
. Since
2 >9/8,
R

has the higher opportunity cost.

2. Have the information to calculate the number of units of market
goods that can be purchased
with one hour of labour: for R this is $12/$5 = 12/5 > 2, while for E this is $9/$5 = 9/5 < 2. Since in each hour of market work R can purchase more units of market goods than E can, and in household work E can produce a greater monetary value of goods per hour than R can, then R's opportunity cost of household production is greater than E's. Marks: 2 for explicit statement of what is being used to calculate opportunity cost, 2 for reasoning behind this use, and 2 for showing and stating that R's opportunity cost of household production is greater than E's Score Page 1 of 1 University of Victoria Economics 339 202009 Midterm answer key: written response questions Question 4 Question 4 Ember (E) and Rajan (R) are a couple with individual productivities in both the market and their home. Each has 10 hours per day to devote to work. E can earn $9 per hour in the market, and can produce goods worth $8 per hour at home. R can earn $12 per hour in the market, and can produce goods worth $6 per hour at home. Market-produced goods cost $5 per unit. Who has the higher opportunity cost of home production? Briefly explain how you determined this. _____________________________ Note: the wording is more confusing than intended. I will accept a couple of answers. Answer: Opportunity cost of household production can be measured in two ways: using monetary values or quantities of good. Information in question gives hourly wage for market work, and "shadow wage" for household production. 1. Using hourly compensation in both production settings: if E switches one hour from market labour to household labour, the couple loses $9 worth of market produced goods and gains $8 worth of home-produced goods. This means the opportunity cost of an hour of household production = $9/$8 =9/8. Following the same reasoning, the opportunity cost of an hour of household production for R = $12/$6 = 2. Since 2 >9/8, R has the higher opportunity cost.
2. Have the information to calculate the number of units of market goods that can be purchased
with one hour of labour: for R this is $12/$5 = 12/5 > 2, while for E this is $9/$5 = 9/5 < 2. Since in each hour of market work R can purchase more units of market goods than E can, and in household work E can produce a greater monetary value of goods per hour than R can, then R's opportunity cost of household production is greater than E's. Marks: 2 for explicit statement of what is being used to calculate opportunity cost, 2 for reasoning behind this use, and 2 for showing and stating that R's opportunity cost of household production is greater than E's Score

Bargaining II: What determines the threatpoints?

ECON 339: determination of threatpoints in marital bargaining

Threatpoint # 1: never marry (forward looking) or divorce
If the alternative to a cooperative outcome is being single – either never marrying, or divorcing – then the threatpoint utility for each party is the best they can achieve if they are single.
This generally depends on
i) laws: division of marital property upon divorce
who can hold property
inheritance
ii) earning potential
iii) social norms: did you watch “Mad Men”?
http
://
www.post-gazette.com/tv-radio/2010/07/25/Mad-Men-series-inaccurately-depicts-difficulties-of-divorce-for-women-in-60s/stories/201007250142

Text covers some evidence in chapter three – read it.
“earnings potential”
– most of the complications arise when there are children. Why?
1. has one partner cut back on market work to stay home with the children? If so, how easy is it to re-enter the market?
2. If the children are young, how easy is it to find childcare at the right cost, with the right hours (part time, weekends and evenings…)
3. potential wages depend on human capital – acquired either through education (level, major) or work experience. If expected to spend time out of the market for homework, would this affect education choice?

Threatpoint # 2: Non-cooperative equilibrium within marriage.
Rather than trying to cooperate, each individual acts to maximize their own best interest, taking as given the choices of the other (pp 75-77 in text)
(Usually the non-cooperative Nash equilibrium is used as the outcome)
Perhaps acting more as room-mates than partners, but still living together.
If this is the threatpoint within marriage, changes in divorce laws will not affect division of welfare within marriage – but who gets the child benefit cheque might.

Canada: universal child care benefit
“To receive the UCCB, you must meet the following conditions:
You must live with the child, and the child must be under the age of 18.

You must be the person who is primarily responsible for the child’s care and upbringing. Primarily responsible means that you are responsible for such things as supervising the child’s daily activities and needs, making sure the child’s medical needs are met, and arranging for child care when necessary. If there is a female parent who lives with the child, the CRA usually considers her to be this person. However, it could be the father, a grandparent, or a guardian.”
Source: http://www.cra-arc.gc.ca/uccb
/

(bold and italics mine)

Econ 339: comparative advantage and gender roles (Eswaran pp 2

1-213)

Time allocation in two-person household:
specialization and trade

From WHO COOKED ADAM SMITH’S DINNER?
P 16: “For the butcher, the baker and the brewer to be able to go to work, at the time Adam Smith was writing, their wives, mothers or sisters had to spend hour after hour, day after day minding the children, cleaning the house, cooking the food, washing the clothes, drying tears and squabbling with the neighbours. However you look at the market, it is always built on another economy.
P. 56: “…the very notion of a full-time career is still built around full-time domestic help.”
Econ 339: comparative advantage and gender roles
2
Does everyone know who Adam Smith was/did?
Author of The wealth of nations
Source of free markets; argued that if everyone selling/producing to maximize
own profits would maximize wealth/welfare.

Quotations from WHO COOKED ADAM SMITH’S DINNER? (proper citation to come)
P 16: “For the butcher, the baker and the brewer to be able to go to work, at the time Adam Smith was writing, their wives, mothers or sisters had to spend hour after hour, day after day minding the children, cleaning the house, cooking the food, washing the clothes, drying tears and squabbling with the neighbours. However you look at the market, it is always built on another economy.
For “what is home production, and why do we care?” P 17: “Adam Smith only succeeded in answering half of the fundamental question of economics. He didn’t get his dinner only because the tradesmen served their own self-interests through trade. Adam Smith got his dinner because his mother made sure it was on the table every evening.”
P. 56: “…the very notion of a full-time career is still built around full-time domestic help.”

Econ 339: comparative advantage and gender roles
4
Market work vs homework
B: 2 person household
Suppose, for the moment, we ignore leisure:
Either L = 0, or fixed
Look at allocation of total household time between M and H
Suppose each individual has ability to produce both home goods and market goods, as given by
Hourly productivity
Market goods Home production
Fred $6/hr $5/hr
Jane $5/hr $10/hr

Econ 339: comparative advantage and gender roles
5
Single vs couple
Consider 8 hour day for each individual
Daily productivity
Market goods Home production*
Fred $6/hr x 8 hrs = $48 $5/hr x 8 hrs = $40
Jane $5/hr x 8 hrs = $40 $10/hr x 8 hrs =$80

Sketch individual budget constraints.
If specialize, and exchange, sketch budget set.

Individual ppfs to joint ppf
1. INTERCEPTS
a) horizontal? if both spend all their time in home production, total value of goods produced is bundle A in diagram: 80 (from Jane) + 40 (from Fred) = 120
b) vertical? If both spend all time in market labour, maximum consumption of market produced goods is bundle C in diagram: 40 (from J) + 48 (from F) = 88

Econ 339: comparative advantage and gender roles
6

2. SLOPE of joint ppf? Reflects the opportunity cost of household production.
Depends on productivities of the two individuals in the two areas of production.
Start with bundle (0, 88), where both work full time in market
.
If want any household production, one (or both) individual(s) must take time away from market labour. Consider adding one unit of household produced goods.
ASSUMPTION: couple wants to maximize the value produced by the joint labour. This requires minimizing the cost of this first unit of home-produced goods. Therefore:
the person with the lower opportunity cost should go switch first.

Econ 339: comparative advantage and gender roles
7

Comparing opportunity costs: comparative advantage
Consider Jane. If she shifts one hour from market to the household, market consumption is reduced by $5 and household production = 10
Jane’s opportunity cost = $5/$10 =0.5
Using the same logic, the opportunity cost of one more unit of household production from Fred = $6/$5 = 1.2 > 0.5
Jane has a comparative advantage in household production
Fred has a comparative advantage in market production.
Econ 339: comparative advantage and gender roles
8

Efficient allocation of labour for each possible bundle of (home produced goods, market produced goods) on joint ppf?
Start at both full time in market labour: point A in diagram.
First hours shifted from market labour to household production should be Jane’s. This is portion A-B in diagram.
Slope of joint ppf = slope of Jane’s individual ppf.
At B, Jane is fulltime in household production.
Any further increase in household production must come from Fred shifting time from market to household: portion B-C in diagram.
Slope of joint ppf = slope of Fred’s individual ppf.

Econ 339: comparative advantage and gender roles
9

Kink at point B?
Couple’s opportunity cost of an additional unit of household produced good increases as Fred starts working in household along with Jane.
At B, each individual is spending full time in activity of comparative advantage.
Econ 339: comparative advantage and gender roles
10

Econ 339: comparative advantage and gender roles
11

Econ 339: comparative advantage and gender roles
12

Econ 339: comparative advantage and gender roles
13
Single vs married
Optimal division of time?
Depends on preferences between C and G
Suppose perfect substitutes – care only about
total quantity of C+G
Suppose perfect complements?

Econ 339: comparative advantage and gender roles
14
Suppose both G and C are private goods, and partners split both goods 50/50 – what would gain from marriage be for each individual?

If ppf for 50/50 split inside individual’s ppf, better off single

Econ 339: comparative advantage and gender roles
15
Suppose G is public good (kids?)

Econ 339: comparative advantage and gender roles
16
How would time allocations change in response to change in market wages?
Fred’s wage?
Jane’s wage?

Econ 339: comparative advantage and gender roles
17

C
G
Dotted lines: Fred’s original ppf, and
original joint ppf (with Fred’s wage = w1
Effect of a change in Fred’s market wage: only income effect
Solid lines: Jane’s original ppf, Fred’s
new ppf, new joint ppf (with Fred’s
wage =w2 > w1
Increase in Fred’s wage decreases Jane’s time in market work.
Fred’s ppfs
Jane’s ppf

Econ 339: comparative advantage and gender roles
18

C
G
Dotted lines: Fred’s original ppf, and
original joint ppf (with Fred’s wage = w1
Effect of a change in Fred’s market wage: income and substitution effects
Solid lines: Jane’s original ppf, Fred’s
new ppf, new joint ppf (with Fred’s
wage =w2 > w1
Increase in Fred’s wage increases Fred’s time in market work.
Fred’s ppfs
Jane’s ppf

Econ 339: comparative advantage and gender roles
19
Other changes to consider:
Increase in Jane’s market wage
– Fred still has absolute advantage in market
– Jane now has absolute advantage in market, but Fred still has comparative advantage in market
– Jane has absolute and comparative advantage in market
2. Increase in productivity in household work
– for one or both individuals.

Production possibility curves

Joint ppf in
Market goods
A
88

Complete specialization
B
48 Fred’s PPF

Jane’s PPF

40 80 120
household goods

A-B: Fred specializes in market, Jane works in both

B-C: Jane specializes at home, Fred does both

Production possibility curves

Joint ppf in
Market goods
A

Complete specialization

Fred’s PPF

Jane’s PPF

120

household goods
A-B: Fred specializes in market, Jane works in both
B-C: Jane specializes at home, Fred does both

What do I do with my time II?
Division of labour in two person household

Household and market production

ECXON 339: allocation of time for couple

What is household production?
“Household production is best considered as the production of goods and services by a separate economy, complementary to and competitive with the market economy. Every country can be analysed as two linked economies. The household sells labour to the market; it uses the money income to purchase intermediate commodities from the market which it transforms into items of final consumption through the use of its own unpaid labour and its own capital goods.”
Ironmonger, 2003: paper on importance of time use data: http://www.vub.ac.be/TOR/iatur/abstracts/doc/paper-92 )
ECXON 339: allocation of time for couple
2

D. Ironmonger, entry on “Household Production”
in International Encyclopedia of the Social and Behavioural Sciences, 2001
http://www.sciencedirect.com/science/article/pii/B0080430767039644
Household production is the production of goods and services by the members of a household, for their own consumption, using their own capital and their own unpaid labor. Goods and services produced by households for their own use include accommodation, meals, clean clothes, and child care.
ECXON 339: allocation of time for couple
3

The process of household production involves the transformation of purchased intermediate commodities (e.g., supermarket groceries and power-utility electricity) into final consumption commodities (meals and clean clothes). Households use their own capital (kitchen equipment, tables and chairs, kitchen and dining room space) and their own labor (hours spent in shopping, cooking, laundry, and ironing)
ECXON 339: allocation of time for couple
4

Statistics Canada: Women in Canada: a Gender based Statistical Report
http://www.statcan.gc.ca/pub/89-503-x/2010001/tbl-c-g-eng.htm
Table 6: Time spent on unpaid care of a child in the household, by working arrangement and age of youngest child, Canada, 2010
Table summary: This table displays the results of time spent on unpaid care of a child in the household. The information is grouped by Working arrangement and age of youngest child appearing as row headers, women, men appearing as column headers, calculated using average number of hours per week as a unit of measure.
ECXON 339: allocation of time for couple
5

Table 6:
Working arrangement and age of youngest child Women Men
average number of hours per week
All women and men 50.1 24.4*
Working arrangement
Respondent was working
Dual earner couples; respondent working full-time 49.8 27.2*
Dual earner couples; respondent working part-time 59.4 40.5*
Single earner couples; respondent working 50.8 25.5*
Lone parents; respondent working 26.9 12.0*
Respondent was not working
Single earner couples; respondent not working 81.3 36.9*
Couples; neither partner working 59.5 36.3E*
Lone parents; respondent not working 30.0 8.1E*
Age of youngest child in the household
0 to 4 67.5 30.2*
5 to 14 37.7 19.7*
E use with caution
* statistically significant difference between women and men at p < 0.05 Source: Statistics Canada, General Social Survey, 2010. ECXON 339: allocation of time for couple 6 Table 7 Time spent on household domestic work, by working arrangement, Canada, 2010 Table summary: This table displays the results of time spent on household domestic work. The information is grouped by working arrangement appearing as row headers, women and men appearing as column headers, calculated using average number of hours per week as a unit of measure. ECXON 339: allocation of time for couple 7 Table 7: Time spent on household domestic work, by working arrangement, Canada, 2010 Working arrangement Women Men average number of hours per week All women and men 13.8 8.3* Working arrangement Respondent was working Dual earner couples; respondent working full-time 13.9 8.6* Dual earner couples; respondent working part-time 21.0 11.8* Single earner couples; respondent working 15.2 8.8* Singles; respondent working 7.7 6.1* Respondent was not working Single earner couples; respondent not working 23.4 14.6* Couples; neither partner working 17.3 10.6* Singles; respondent not working 10.0 6.3* * statistically significant difference between women and men at p < 0.05 Source: Statistics Canada, General Social Survey, 2010. ECXON 339: allocation of time for couple 8 Aguiar, et al (2013): “Time use during the great recession: http://www.aeaweb.org/articles.php?doi=10.1257/aer.103.5.1664 “Using data from the American Time Use Survey between 2003 and 2010, we document that home production absorbs roughly 30 percent of foregone market work hours at business cycle frequencies. Leisure absorbs roughly 50 percent of foregone market work hours, with sleeping and television watching accounting for most of this increase. We document significant increases in time spent on shopping, child care, education, and health. …” ECXON 339: allocation of time for couple 9

Behaviour in economic situations II

Notes from “Gender differences in Behavioral Traits and Labor Market Outcomes” (citation to be added)
This article provides a nice survey of both economic and psychological studies on this topic, and includes references not in text.
Data mostly from US, but international references as wellWhy
Two questions:
Why do men and women sort into different careers?
Why does share of women in a given occupation decrease with seniority?

Focus on 4 traits that emerge from literature:
Risk preference
Competitiveness
Propensity to negotiate
Social attitudes
These traits are not independent
(Seem to relate traits with preferences)
Will follow order in paper.

Risk preference
– studies from both disciplines find women are LESS tolerant than men, on average
– depends on context – see discussion in Eswaran
How does this affect labor market behavior?
– all else equal, men more likely to sort into occupations with higher risk – physical and/or financial.
-(I have not seen any paper that mentions the high risk women undertake in pregnancy)

Why does this matter?
– more risky occupations tend to have higher salaries/wage rates.
– utility is increasing in income (can buy more with higher income, all else equal) and decreasing in risk (seems to be true for majority of market participants).
– higher salaries compensate for higher risk
(what have we learned about this from COVID-19 and essential services)

– if men are less risk averse, the minimum income required to hire men will be less than that required to hire women.

Is this really a preference regarding risk?
What else might yield observed results?
Greater aversion to losses
Different subjective evaluations of probabilities (does everyone know own risk, as we assume in most undergrad econ courses?)
Uncertainty about preferences or payoffs

Correlation with economic outcomes?
1. educational choices
If technical area perceived as being more risky than other areas, women might choose less risky fields.
Risk aversion may affect strategies used in taking tests
2. test performance
If women are more risk averse (on average) than men, may be less likely to guess on tests
Multiple choice, true/false..
Marks may be lower – on standard tests used for entry to fields of study/certifications (might this be a problem for online exams? Open book?)

Other choices?
Finances and investment – women may choose a lower proportion of equity in portfolios
Regarding the stock market crash of 2008-09, and the gender ratio in traders, see
Wall Street wants more female traders.
Occupational choice

Gender differences in competitiveness
Subjective, difficult to measure
2 measures suggested in literature:
willing to enter a tournament (observable) and
“competitiveness trait” (not directly observable)
Why does this matter?
Promotion (and associated higher salaries) may require taking risks.

Evidence on differences in willingness/ability to compete is mixed – depends on context.
Source of differences?
a) biology: not obvious. As an anecdote, not data, I have seen reports that females and men are most similar in risky behaviour and competitiveness when women are menstruating. (I will try and find a reference.)
b) gender stereotypes about tasks: some are perceived as more “suitable” to one gender rather than the other. Examples? Math, nursing, day care workers, university professors…
c) culture and social norms: the gender c
omposition of some professions differs across cultures. Example? Another anecdote: an economist from Russia once told me that in Russia most economists, and doctors, were female; these were considered low status occupations.
One reference comparing female ratios in medicine: Women’s Participation in the Medical Profession: Insights from Experiences in Japan, Scandinavia, Russia, and Eastern Europe/

Why marriage?

Eswaran, ch 7

ECON 339: marriage and fertility 1 1

What is marriage?

• A well-written and interesting book: Stephanie
Coontz (2005) Marriage, a History: from
obedience to intimacy or how love conquered
marriage.

• Extended review/summary can be found at

• https://shaunmiller.wordpress.com/2011/02/
04/book-review-marriage-a-history-from-
obedience-to-intimacy-or-how-love-
conquered-marriage-by-stephanie-coontz/

ECON 339: marriage and fertility 1 2

https://shaunmiller.wordpress.com/2011/02/04/book-review-marriage-a-history-from-obedience-to-intimacy-or-how-love-conquered-marriage-by-stephanie-coontz/

1. Social and private benefits of marriage

• Social?

•

oes society as a whole benefit from the
institution of marriage? Is social welfare
higher when more individuals are married?

• Private?

• Are married individuals better off than
singles?

• Are children better off if their parents are
married?

ECON 339: marriage and fertility 1 3

Social benefits of marriage

• 1. crime rates (marriage civilizes males*):

– married men have lower crime rates than
otherwise identical single men

– evidence that marriage is causal

– effect strongest among men who marry relatively
early in life – relevant peer group changes.

– some theories based on evolutionary biology
– one concern raised over current imbalance in
marriage market in China

*nature or nurture?

ECON 339: marriage and fertility 1 4

2. Private benefits of marriage

• Some the same for men and women, some different.

• 1. less alcohol and drug abuse

• – lower for both men and women

• 2. better physical and mental health

Physical: women live longer because income higher

men live longer because take on less risk

Mental: married people happier than singles, in
general (married men tend to be happier than
married women)

ECON 339: marriage and fertility 1 5

Basis for marriage I

• Economic view: gains from specialization

• gains come from comparative advantage

• What is the source of comparative advantage?

• 1. if individuals start with identical skills, but there
is learning-by doing, then specialization in market
and homework is efficient.

• 2. who does what? Any small initial difference will
determine this. If childcare is major part of
homework, women have comparative advantage:
child bearing, breast feeding…that is all it takes.

ECON 339: marriage and fertility 1 6

Basis for marriage II

• Evolutionary psychology:

• – human infants need continued care, for a relatively
long period of time – before and after birth

• – mother provides much of this care; who provides
resources to care for mother and young child?

• – father. Who is the father?

• – Easy to identify birth mother; father not so easy.

• – marriage: women and men trade access to
resources for paternity certainty

ECON 339: marriage and fertility 1 7

Marriage forms

• 3 basic types:

• Monogamy: one partner at a time

• Polygamy: more than one partner at a time.

• Serial monogamy: one partner at a time, but divorce
and remarriage

• Polygamy has two recognized types:

• polygyny (most common): one man, multiple wives

• polyandry: one woman, multiple husbands

ECON 339: monogamy and polygamy 8

Frequencies?
• Polygyny common in agricultural societies, and not

unknown today (Bountiful, BC is well known
Canadian case:
http://www.theatlantic.com/health/archive/2013/02/when-
taking-multiple-husbands-makes-sense/272726/

• Commonly thought that polyandry relatively rare –
limited to the Tibetan plateau

• Recent research suggests is was much more
common, although seldom the dominant cultural
form.
http://www.theatlantic.com/health/archive/2013/02/when-
taking-multiple-husbands-makes-sense/272726/

• Monogamy increasingly dominant

ECON 339: monogamy and polygamy 9

http://www.theatlantic.com/health/archive/2013/02/when-taking-multiple-husbands-makes-sense/272726/

Economic rationales for different forms?

• Emergence of polygyny (Becker)

• Emergence of monogamy (Gould, et al, 2008)

• Consider a society where land is the only asset, and it is
owned by men.

• Let there be men in this society, and women.

• Case I: , and all men are identical, as are all
women

• – this means that payoff if single to each woman
is

• – each man owns same amount of land, and has
payoff if single =

ECON 339: monogamy and polygamy 10

mN wN

w mN N

m fP P

• Suppose that output from land can be increased by
adding more workers, but the only way for a man to
obtain more labour for his land is to marry

• There is diminishing marginal productivity (MP) of
workers.

• MP

•

Pf
•

•

• 1 2 3 4 # wives

ECON 339: monogamy and polygamy 11

Marriage market outcome?

• If monogamy,

• 1. not all women marry (recall assumption of fewer
men than women)

• 2. competition for husbands drives “bride price” down
to Pf

• What is a bride price? Payment by groom, or groom’s
family, to bride, or bride’s family

• Essentially: prior to marriage, woman (or girl) would
have helped on the land owned by her parents.

• Bride price paid to bride’s parents is compensation for
the loss of her labour

ECON 339: monogamy and polygamy 12

Marriage market outcome if polygyny?

• In example, if there were enough women (relative
to men) all men would be willing to have two
wives, given bride price = woman’s payoff if single

• Suppose not enough women for this, but still more
women than men, this not feasible.

• If polygyny condoned, then some men have two
wives and others one.

• Bride price in this market?

• Greater than under monogamy. Why?

• Now there is a shortage of women – price rises to
meet demand.

ECON 339: monogamy and polygamy 13

Welfare under monogamy vs polygyny?

• Women better off under polygyny.

• All men marry

• All women marry, unless they choose to stay single.

• Does this fit with “real world” evidence?

• If not, what is missing here?

ECON 339: monogamy and polygamy 14

Polygyny with sex ratio = 1.

• Consider: equal numbers of men and women

men own land, the only asset

unequal distribution of land.

Some men can afford more than one wife,

some can afford only one

some may not be able to marry.

Problem? Arising from inequality amongst men

ECON 339: monogamy and polygamy 15

Why is polyandry less common?

• Uncertainty regarding paternity

– (evolutionary psychology strikes again)

• Fraternal polyandry: brothers marrying one
woman.

ECON 339: marriage and fertility 1 16

Why is monogamy dominant in developed
economies?
• 1. With development, human capital becomes

important source of income (instead of, say, land).

– Men with more human capital want kids with more
human capital – for this, need/want wives with more
human capital.

– price in marriage market for women with more
human capital rises (relative to women with less)

– Rich educated men have one wife; wealth grows

– Rich uneducated men have > one wife, but wealth
does not grow

ECON 339: marriage and fertility 1 17

Alternative theory

• 1. Societies where monogamy is dominant
perform better economically than societies
where polygyny is dominant

• – under polygyny, resources devoted to
securing (and maintaining) multiple wives

• – some men may not marry – leads to social
unrest.

ECON 339: marriage and fertility 1 18

Transfers between family members at marriage

• 1. Bride price

• (payment from groom, or groom’s family, to bride, or bride’s family)

• 2. Dowry
– Wealth woman brings to marriage, provided by

her family

– Depending on society, may remain under her
control or may be controlled by the husband

– Examples?

– Round table (King Arthur)

ECON 339: marriage and fertility 1 19

Dowries as early inheritance

• Consider altruistic parents, with a son and a
daughter.

• If tradition/culture says that son inherits property
(farm or other business) and son provides for parents
when they are older (so marriage is virilocal), what is
best way to provide inheritance for both children?

• Ans (Botticini and Siow, 2003): give daughter share of
parents’ wealth when she marries, give son
remainder when parents die.

ECON 339: marriage and fertility 1 20

Rationale for this division?

• Before daughter marries, both son and daughter help
support parents – work on farm, in home

• After daughter marries, her labour benefits husband’s
family.

• If she receives share of parents’ wealth when they die,
she benefits from inputs provided by brother between
her marriage date and parents’ death.

• Son does not receive full benefits of his labour once
parents die; has incentive to reduce labour.

• Giving daughter inheritance early solves incentive
problem.

ECON 339: marriage and fertility 1 21

Issues with dowries?

• Who benefits?

• Current situation (India,…)

• More on this later.

ECON 339: marriage and fertility 1 22

Examples of dowries

• http://www.chinese-wedding-
guide.com/chinese-dowry.html

• British mythology: King Arthur and the round
table.

ECON 339: marriage and fertility 1 23

http://www.chinese-wedding-guide.com/chinese-dowry.html

• http://www.chinahighlights.com/travelguide/c
ulture/ancient-chinese-marriage-customs.htm

• http://www.mahavidya.ca/the-hindu-dowry-
system-origins/

ECON 339: marriage and fertility 1 24

http://www.chinahighlights.com/travelguide/culture/ancient-chinese-marriage-customs.htm

http://www.mahavidya.ca/the-hindu-dowry-system-origins/

Marriage and children I

Quantity, quality, costs

ECON 339 Investments in children

How do economists view the role of children?
Three roles:
1. consumption good: argument of parent(s)’ utility function(s)
2. social insurance: as providers of support for elderly parents
3. household labour: in home, on farm, family business…
Importance of these roles can vary across economic circumstances, including stage of development of economy.
ECON 339 Investments in children
2

A: Developed economies
In an economy with a well-established social welfare system (employment insurance, pensions…) focus on children as arguments of utility function.
1. Simplest model:
a) preferences: household utility function (unitary model or identical preferences) defined over number of children (n) and all other goods (A)
b) constraints: unit price for A=1,
unit price of child = c,
fixed income = y
ECON 339 Investments in children
3

All other goods (A)
Assume: fixed income y
y price per child c
unit price A =1
Preferences: identical
optimal choice? (n*,A*)
A*

n* y/c # of children (n)
ECON 339 Investments in children
4

1. What happens as income increases?
if children and A both normal goods, both increase with income
2. What happens as c goes up?
income and substitution effects
– substitution effect: opportunity cost of children increases; if initial IC still feasible, n↓ and A↑
Income effect: budget set decreases →household moves to lower IC
→both A and n fall, if both normal
Net effect? A ambiguous; n ↓

ECON 339 Investments in children
5

What might cause these changes?
1. income increase without changing cost of children?
Transfers from government
Inheritances
…..?
2. increase in cost per child without change in income?
– increase in # years of required schooling
– decrease in sports, etc, in school system
– …?
ECON 339 Investments in children
6

Income and the cost of children
Suppose the cost `c` per child is in time, not money: so each child requires t units of time per period.
Let be wages of male and female, respectively, and let each person have one unit of time per period.
Then: if n =0 (no children), income is .
Suppose couple has one child. What is value of income?
ECON 339
7

Depends on who takes time to look after the child:
Let be the time spend in childcare by the male and female respectively.
Then and income is

If , income is maximized when , so the female does all the childcare.
With more than one child, if each needs t units of time, the female spends more time out of the market, and income falls more.
ECON 339
8

How is time different from money?
If view this as a lifetime, once-and-for-all decision, nothing.
In a unitary family model, nothing.
If bargaining period-by-period….
Suppose two periods
First period, childcare for one child (so time = t<1) Second period: both parents work full time Bargaining at beginning of period ECON 339 9 How is time different from money? If view this as a lifetime, once-and-for-all decision, nothing. In a unitary family model, nothing. If bargaining period-by-period…. Suppose two periods First period, childcare for one child (so time = t<1) Second period: both parents work full time Bargaining at beginning of period ECON 339 10 2nd period 2nd period wages increasing in time spent in market in first period Male: Female: Wage difference? period 1: period 2: If first period childcare not split equally between parents, even if initial wages are the same, a gap emerges in 2nd period. ECON 339 11 Have: n increases with income, if constant c Then why do poor people have more children than people with higher income Why are families larger in developing countriesÉ Role of children as social insurance and support for old age In developing countries, financial markets are less complete – fewer avenues for saving for old age ECON 339 12 Quality of children Observations (Becker): 1. over time, income has grown and fertility declined; 2. cross section data: inverse correlation between income and fertility Why? Are children inferior goods? Ans: Parents have preferences over both number of children, and quality per child: children are a normal good, but multi-dimensional. What is "quality"? -children a durable good; - quality is increasing in expenditure/child expenditures on human capital - time, money, level of education Simple static model: unitary household assumption: quality same per child Problem: max subject to Variables in utility function? n = number of children q = quality per child A = “all other goods” reflecting parents' standard of living; let unit price be 1 Variables in budget constraint? I = total household income = price index of goods & services for children = price index of goods & services for adults Notice: budget constraint is not linear in n and q. Variables in budget constraint? I = total household income = price index of goods & services for children = price index of goods & services for adults Notice: budget constraint is not linear in n and q. as n , additional quality/child more expensive (marginal cost of child quality increases with number of children, given all children of same quality) as q , additional child more expensive (marginal cost of child is increasing in child quality – again, given all children of same quality) optimal choice may lead to n as income  depending on income and substitution effects - income elasticities Children, part 2: expenditure on children parents determine human capital investment in children, and direct transfers - are parental choices efficient? how are resources divided between siblings? Possibilities: - equally - to compensate for inequality - to reinforce inequality diagram: - axes: wealth of child 1, child 2 - 45° line: equal concern - parent's IC's symmetric about this - : earnings levels of children if parents make no investment in human capital - : earnings if wealth-max'g human capital investment Can derive a “wealth possibility frontier” for children. Given parents’ preferences over distribution of wealth across children, and (income) benefits to children from human capital investment, can derive parents' choice of investment (in human k) and transfer of financial assets. With 2 children, 1. with equal concern, and ass'm that child 1 receives higher payoff from human k investment than does child 2, parents invest more in human capital of child 1, and give more transfers to child 2 - to equate wealth 2. if parents are wealthy enough, both receive wealth-max'g human k, and transfers (efficient investment) Results? - parents' investments reinforce endowment differences - investments are socially efficient - transfers counter earnings differences 3. If parents are not sufficiently wealthy to allow efficient human k investment in both children, then, more educable child has higher wealth - human capital investments in at least one child too low for efficiency Cost of children – evidence? 1. Manitoba Agriculture: estimates on raising a child to age 18 (average; not calculated after 2004): - costs vary by sex: - daughter $166, 549 - son $166,972 (higher food costs) - costs non-linear in age: - first yr most expensive (over $10,000) - lowest at 12 yrs ($7000) - increasing through teen age yrs 2. Canada’s federal child support guidelines: - amount varies with - income (of payer) - province of residence - number of children Research on family spending shows there is no single fixed cost of raising a child. Families spend more on their children as family income increases, with the proportion of family income devoted to children remaining the same across all levels of income. So the "cost of raising a child" depends on how much income, and how many children the family has. The paying parent's contribution is set in accordance with the average proportion of income that parents at that income level spend on their children. The receiving parent is presumed to contribute to the children in proportion to own income. (Canada, Department of Justice, FAQS on child support guidelines) Moneysense magazine http://www.moneysense.ca/magazine-archive/the-real-cost-of-raising-kids/ http://www.moneysense.ca/save/financial-planning/the-real-cost-of-raising-a-child/ August 2011 issue: “…$243,660 as the total cost of raising a typical child to age 18 (in other words, until the day before his or her 19th birthday). That’s $12,825 per child per year or $1,070 per month.” Revised, April 2015: “Adjusted for inflation that figure today would be $13,366 pushing the total cost of raising a child past the quarter million mark—a $10,200 increase in four years.” ECON 339 Investments in children 25 3. “The Cost of Raising Children” by C. A. Sarlo; The Fraser Institute, Sept. 2013 “Prevailing estimates of the cost of a child for Canada and the United States, currently, tend to be in the range of $10,000 to $15,000 per annum. These cost estimates have a distinct middle class bias and do not reflect the reality of raising children in lower income and newer immigrant households. There is a concern that such estimates send a clear message to lower income families that they really cannot afford children and, perhaps, shouldn’t have any. “Examining the basic marginal costs necessary for the healthy development of a child, this paper finds that an annual outlay of $3,000 to $4,500 (depending on the community or region and the age of the child) would be sufficient. “These cost estimates exclude any savings strategies such as home gardens, sewing and knitting clothing, couponing and taking advantage of sales, own repair and maintenance work in the home, etc. This cost range is for Canada in 2010 and is drawn from budget standard estimates by social agencies and experts with experience in this area. It can serve as a useful benchmark for child costs. “These cost estimates exclude any savings strategies such as home gardens, sewing and knitting clothing, couponing and taking advantage of sales, own repair and maintenance work in the home, etc. This cost range is for Canada in 2010 and is drawn from budget standard estimates by social agencies and experts with experience in this area. It can serve as a useful benchmark for child costs. , mf ww mf yww =+ , mf tt mfmf tttttt +=®=- (1)(1())(1)(1) so () ffmfffmf mffmfm ywtwttwtwtt ywwtwwtw =-+--=-+-+ =++-- mf ww >
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ECON339: consumer demand 1

Consumer demand

ECON 339: consumer demand 2

Consumer demand

• Consumer equilibrium: choice of optimal bundle given income and
prices – that is, given the budget set

• What happens if the budget set changes?

– What causes changes in budget set?

• i)Change in income, holding prices constant

• ii) Change in one price, holding other price and income
constant

• iii) Change in both prices?

• iv) Change in one price, and income?

ECON 339: consumer demand 3

i) Income effects

• Why does optimal bundle change in response to change in income?

• Recall: given “rationality”, maximizing utility requires spending
all income – consuming at a point on the BL

• If income , with prices constant – BL shifts to the right

– Points formerly on BL now strictly interior

– Former choice no longer the best

• How does composition of optimal bundle change?

ECON 339: consumer demand 4

Normal and inferior goods

• What changes to optimal bundle are possible?

• Both goods increase?

• One increases, other decreases?

• Both decrease?

• Conclusion: consumption of at least one good must increase in
response to increase in income.

• Alternative phrasing: “at least one good must be normal”

• Alternative to normal good?

Inferior good: quantity decreases in response to increase in

income, with prices constant

ECON 339: consumer demand 5

Income expansion path, Engel curves

• Income expansion path:

– In goods (x,y) space
– Curve joining optimal consumption bundles as income varies,

with prices constant
– Slope reflects type of goods

• Both normal
• One normal, one inferior

• Engel curve:

– In (good, income) space
– plots consumption path of a particular good as income varies
– Slope reflects sign of income elasticity:

– Normal good vs Inferior good

– Luxuries (income elastic) vs necessities (income-inelastic)

%
%

q Y q
Y q Y
∆ ∂

=
∆ ∂

ECON 339: consumer demand 6

ii) Price effects

• With 2 goods, have “own-price” effects, and “cross-price effects”
– As with changes in income, quantities change because budget set

changes when one or more prices change.

• A)

Own price effects

– Holding constant income and other price(s), how does quantity
demanded of one good change as its price changes?

– Properties of the demand curve for this good

– Def’n of demand curve?
• Quantity demanded of a good, at each price of that good,

holding income and other prices fixed.

ECON 339: consumer demand 7

Own price effects

• Consider following experiment:

1. Initial budget set {Y, pf′, po′}
– consumer chooses bundle A =
– conditions satisfied by this bundle?

2. Price of food decreases to pf″ < pf ′, with income and price of other

goods constant
– new budget set defined by {Y, pf″, po′}

– consumer chooses bundle B =
– conditions satisfied by this bundle?

ECON 339: consumer demand 8

Income and substitution effects

• What has happened to budget set as price falls?

– increased in size: original optimal bundle now interior

– slope of BL changed:
– at original optimal bundle, no longer true that MRS = price

ratio

– both these changes will alter optimal bundle

– to analyse total effect, we disentangle theminto separate effects:

– income effect: change in size of budget set

– substitution effect: change in relative prices

ECON 339: consumer demand 9

Income & substitution effects

• Given: A is original bundle, B is new
• Substitution Effect:
• Consider point C: on original IC (through A) where

MRS = new price ratio
– Consumer indifferent between A and C
– since give same utility level, “choice” between them based on

relative prices

– Movement from A to C represents substitution effect – change in
quantities purchased due to changes in relative prices, with utility
held constant.

– sign of subst’n effect?
– decrease in unit price of food, all else constant, means
relative price of food falls → substitute towards food → Δq/Δp < 0

ECON 339: consumer demand 10

Income & subst’n effects

• Income Effect:

– Movement from C, on original IC, to B (optimal bundle with new
prices)

– same relative price, B on higher IC
– response to budget set expansion

– Sign of income effect? Depends:

• normal good
• inferior good

• Net effect: Income plus substitution effect

– Slope of demand curve
• Normal good:
• Inferior good:

ECON 339: consumer demand 11

Cross price effects

• Change in quantity of one good in response to change in price of other
good, all else constant

• In general….?

• Disaggregate into income & subst’n effects:
– with 2 goods, subst’n effect:

– income effect?

• Complements and substitutes

ECON 339: consumer demand 12

iii) Changes in both prices?

• Change both prices, holding income constant:
– Shift both slope and position of BL

• proportional change (both prices increase by 10%)?
• Different increases (food up by 5%, other goods up by 2%)

• Changes in both prices and income, in same proportion

(eg, both prices and income increase by 10%)
– Budget set unchanged

Econ 339 – basic consumer model 1

Basic econ model of household

Introduction

• Economic analysis of family looks at individuals making choices, given
constraints – as individuals, and collectively

• Will look at both consumption (demand) and production (supply) as
well: ultimately households supply labour to market and purchase
goods and services with their labour income; also, produce goods and
services at home.

• Choices? How to allocate time to best satisfy preferences for goods and
services produced at home and purchased in market, given
productivity in both sectors.

• Start with basic consumer analysis

Econ 339 – basic consumer model 2

Note: math requirements for course

• Will use both diagrams and simple algebra throughout course

• Two – dimensional diagrams
• May need to review:

– Equation of straight line:
• is a constant
• b is also a constant; gives slope of line; slope = ?
• If b > 0, upward sloping line in x-y space
• If b < 0, downward sloping line in x-y space

– Will also use curves (non-linear)

• Less concerned with equations

Econ 339 – basic consumer model 3

y a bx= +
a

Econ 339 – basic consumer model 4

Consumer problem

Consumer: one of basic agents in economy
– purchases goods and services in market (given prices and
income)

How do we describe/define a “consumer/household” as an economic
agent?
– given tastes, makes choices to reach highest possible level of
satisfaction
– goal to “maximize utility subject to constraints”

Two components in simplest model:
1. budget set: set of goods and services household can afford,
given income and prices;
2. preferences: consumer’s tastes: ranking of bundles of
goods and services (indifference curve map; utility
function)

Econ 339 – basic consumer model 5

Consumer demand

• Budget set frequently easier to understand, so start with

this

• Budget constraint:

– Consider two goods: “food”, denoted by f, and “all
other goods”, denoted by o

– Let denote a unit of food, and a unit of “other
goods”

– Let unit prices be and , and total available
income be Y

fq oq

fp op

Econ 339 – basic consumer model 6

Example: suppose food is measured in
kilograms (think of this as bulk food),
and other goods in $

Then the unit price of “other goods” is 1;

Let the price of a kg of food be $2.00

Suppose individual has $30 to spend, so
Y=30.

– Household is limited to those bundles of food and “other goods”
which cost no more than the income available to be spent.

– Given values above, total expenditure on any combination of kg of

food and other goods is

_ Individual has $30.00 to spend, so feasible bundles satisfy

– This is this consumer’s budget constraint, and the bundles satisfying

this inequality are in the consumer’s budget set.

Econ 339 – basic consumer model 7

$2.00 f oq q+

0$2.00 $30.00fq q+ ≤

• Playing with budget set:

If purchase no food, have $30 to spend on other goods

• If spend all money on food (so ), can purchase ____ kg

• If purchase 2 kg of food, how much is left to spend on other goods?

• If purchase qf of food, how much is left for other goods?

• Maximum amount of other goods:

Econ 339 – basic consumer model 8

30 2o fq q≤ −

30 2o fq q

= −

0oq =

From equations to diagram

• Plot budget set, in Cartesian space, with food on horizontal
(x) axis and other goods on vertical (y) axis

• Use numbers from example

Econ 339 – basic consumer model 9

Identify budget line, budget set

Econ 339 – basic consumer model 10

Budget sets

f f o op q p q Y+ =

-Diagram:
-Budget set is in positive quadrant (non-negative quantities)

– bounded by budget line – points satisfying budget set as strict equality.
-In general:

Frequently rearrange equation to write BL as

f
o f

pYq q
p p

= − or of o
f f

pYq q
p p
= −

Given income, prices, quantity of one good: max’m quantity of other good

Econ 339 – basic consumer model 11

Properties of Budget line

• Slope and intercepts of BL?

– Formulae?

– Interpretations?

•Effects of changes in income? Prices?

•Consumer’s purchases/consumption restricted to Budget set

Econ 339 – basic consumer model 12

How does consumer evaluate bundles?

• Consumer preferences/tastes

– Economists are not interested in any particular consumer, but in
patterns

– Assume consumers are “rational”

• “Rationality” assumptions:
1. consumer can always compare bundles: for any two bundles A

and B, can say
either “A is preferred to B”
or “B is preferred to A”
or “A and B are equally preferred”

2. more is preferred to less (ex: food and “other goods” are both

“goods”, not “bads”)

Econ 339 – basic consumer model 13

Preferences

• 3. preferences are consistent (“transitivity”):

– Given 3 bundles A, B, and C,

if consumer says “A is preferred to B” and “B is preferred to C”,

Then if asked to compare A and C, would say “A is preferred to C”

Econ 339 – basic consumer model 14

Utility function

• Summarize preferences by a Utility function

– Mathematical description

– Assigns a real # to bundles of goods

• Simplicity/convenience!

– For two goods, ( , )f oU q q

Utility functions

• How to interpret utility function?

• Bundle with larger number is “better”, according to the
consumer in question

• Relative numbers matter, not absolute numbers

• (ordinal rather than cardinal measure – mostly)

Econ 339 – basic consumer model 15

Econ 339 – basic consumer model 16

Indifference curves (ICs)

• Graphing preferences:

– “indifference curve” – all bundles yielding same level of utility

– Rationality assumptions dictate shapes

• Negative slope (if both are “goods”)
• Convex to origin

– Marginal rate of substitution given by slope of IC

– Indifference curve map – one curve through
each point

– IMPORTANT:
assume preferences, and hence indifference

curves, are fixed/given

Econ 339 – basic consumer model 17

Econ 339 – basic consumer model 18

Utility functions and IC’s

• Common functional forms:

– Linear (perfect substitutes):

• Representative IC: to find equation, fix level of
utility, solve for one of the variables.

• MRS? (slope of IC, times (-1))

1 2U q q= +

2 1q U q= −

Cobb-Douglas utility function

Econ 339 – basic consumer model 19

General functional form:

Example:

Notice: if quantity of either good = 0, U=0

Properties of indifference curves:
-Equation: consider IC through bundle (8, 27)

-then U = 18 (why?)
-then equation of IC is

– MRS?

1
,( )f o f oU q q q q

α α−=

1/3 2/3
,( )f o f oU q q q q=

Econ 339 – basic consumer model 20

Utility functions and IC’s II

– Perfect complements:

• Representative IC?
• MRS?

– Quasi-linear:

• Representative IC? Non-linear, intersects ___axis
• MRS? Depends only on one good

1 2min{ , }U q q=

1 2lnU q q= +

Econ 339 – basic consumer model 21

Consumer choice

• Choices depend on both constraints and preferences

• ASSUME: choose bundle to max utility

– Diagram: superimpose IC map on budget set

• Goal: highest IC on budget set

• Choice? On BL (spend all available income)
tangency of BL and IC

– Algebra: on BL: spend all income:

bundle at which MRS = price ratio

Example of solving for optimal bundle numerically

• Consider budget set from example, and diagram with food on
horizontal axis (need orientation to define slopes)

• Have:

– Equation of budget line is qo=30-qf
• Optimal bundle is on this line, so satisfies this equation

– 2nd condition: MRS = price ratio
» psychic rate of trade-off = opportunity cost
» slope of IC = slope BL

– Suppose CD preferences, with α=1/3; then MRS = 0.5qo/qf
– Slope of BL = -2
– Therefore second equation is 2=0.5qo/qf or qo=4qf

Econ 339 – basic consumer model 22

Numerical example continued.

• Now have 2 equations in 2 unknowns

• Budget line equation: qo=30-qf

• MRS = opportunity cost equation: qo=4qf

• Solve these simultaneously to obtain qf=6

• Substitute back into budget line equation to obtain qo=24

Econ 339 – basic consumer model 23

Basic econ model of household�

Introduction
Note: math requirements for course
Consumer problem
Consumer demand

Slide Number 6
Slide Number 7
Slide Number 8

From equations to diagram
Budget sets
Properties of Budget line
How does consumer evaluate bundles?
Preferences
Utility function
Utility functions
Indifference curves (ICs)

Slide Number 17

Utility functions and IC’s

Cobb-Douglas utility function�

Utility functions and IC’s II
Consumer choice
Example of solving for optimal bundle numerically
Numerical example continued.

Does economic behaviour differ by gender?
(and, if so, why do we care?)

Eswaran ch. 2

Note: gender versus sex
Sometimes used interchangeably
“sex” refers to biology, “gender” to culture
Distinction may be clear in theory (or not), but in practise, when trying to sort out roots of different behaviours, the two are difficult to disentangle.
I will try and keep them distinct, but it will not always be easy – or possible

https://www.psychologytoday.com/blog/the-how-and-why-sex-differences/201110/sex-difference-vs-gender-difference-oh-im-so-confused

ECON 339: economic behaviour and gender (Eswaran ch 2)
2

Why do we care if behaviour differs by sex (or gender)?
We observe differences in
i) labour markets: average wage rates, incomes, executive compensation, time spent in work at home,….
ii) product markets: prices paid for cars, dry-cleaning, haircuts….
iii) capital markets: availability of credit,…..
What is the source of each of these? Behaviour, or discrimination, or a mixture?
Are there implications for efficiency? Equity? Growth?
ECON 339: economic behaviour and gender (Eswaran ch 2)
3

What differences have been observed, and
in what contexts?
Primary source of recent data on behaviour – choices individuals make- is (economic) experiments
Two types of settings:
Labs
Social experiments – most common for development economists working with aid groups
Sometimes economists work with other social scientists – psychologists, sociologists, anthropologists, demographers
ECON 339: economic behaviour and gender (Eswaran ch 2)
4

Evidence from experiments
1. Ultimatum game (Solnick 2001):
Two players, one round
Sum of money to be split is S
Proposer suggests amount willing to give away (all it x) (without disclosing); responder suggests minimum they would accept (call it y) (without disclosure).
Payoffs: If x < y, both get zero; If x=y or x > y, responder gets x, proposer gets (S-x).

ECON 339: economic behaviour and gender (Eswaran ch 2)
5

Results? Average offer was independent of the sex of proposer, but varied with the sex of responders
Proposers, both males and females, made lower offers to female responders than to male responders
Responders, both males and females, made higher demands if proposer was female than if proposer was male.
ECON 339: economic behaviour and gender (Eswaran ch 2)
6

Other experiments on variations of this game yield similar results
Why?

Women are expected to be more cooperative than men?
In sequential version, women accept offers more often than men….they are more cooperative?
In dictator game, females are more generous.
ECON 339: economic behaviour and gender (Eswaran ch 2)
7

2. Social dilemma games
Prisoners’ dilemma?
General outcome: individually rational to always defect – dominant strategy.
Some evidence that women are more likely to cooperate than men are…at least initially.
Suggestion that men are more likely to cooperate, within own group, if there is intergroup competition.
(Intergroup competition does not seem to matter for women’s behaviour.)
ECON 339: economic behaviour and gender (Eswaran ch 2)
8

Prisoners’ Dilemma game
Simultaneous game: 2 players, 2 actions*
Player 2
left right
Player 1 Up (4,4) (8,2)
down (2,8) (6,6)

Convention: in each cell: 1st number is payoff to row player (Player 1 here); 2nd number is payoff to column player (Player 2 here).
*in simultaneous game, action = strategy
ECON 339: economic behaviour and gender (Eswaran ch 2)
9

Prisoners’ dilemma game
In many (most?) situations, the strategy choice that maximizes a player’s payoff depends on choice of other player
PD game: each player has a dominant strategy
– a choice that max’s own payoff, regardless of other’s choice
Here: Player 1 always better off choosing “up”, and
Player 2 always better off choosing “left”
Prediction for choices in one-shot game?
ECON 339: economic behaviour and gender (Eswaran ch 2)
10

Notice: payoffs in dominant strategy eq’m are (4,4)
If played (down, right), would obtain (6,6)
Both players would be better off if played (down, right), but this strategy combination is not individually rational – not an eq’m in a one-shot game.
So: properties of PD game:
dominant strategies
another pair of strategies yielding Pareto superior payoffs
ECON 339: economic behaviour and gender (Eswaran ch 2)
11

3. Negotiation
Women more likely to negotiate harder on behalf of someone else (than for themselves)
Women are more altruistic than men are?
ECON 339: economic behaviour and gender (Eswaran ch 2)
12

Differences in behaviour (choices):
because of preferences or constraints?
1. Competition
given a choice between a setting where payoff depended only on own performance – and not own performance relative to others’ – women more likely than men to choose the former in mixed sex groups.
But: this result different if women knew they would be competing only with other women.
But: in matriarchal society, women more likely to compete than men

ECON 339: economic behaviour and gender (Eswaran ch 2)
13

2. Willingness to take on risk (Degree of risk aversion)
Some evidence that in financial markets women choose less risky portfolios
(Suggestion that had most traders been women, financial crisis of late 2000’s would have been less severe.)
ECON 339: economic behaviour and gender (Eswaran ch 2)
14

Why these differences?
1. Preferences – attitudes are hard-wired, through evolution
Evolutionary biology:
basic differences in cost to men and women of reproduction
Survival probabilities of individuals with different traits
Evolutionary psychology:
Harder to justify
Question: how long does it take to overcome institutions arising from out-dated situations? (Seabright, The War of the Sexes, is a good read on this.)

ECON 339: economic behaviour and gender (Eswaran ch 2)
15

2. Culture and/or social norms
Huge topic
More credible than evolution (I think)
Problem: can help explain why institutions, once in place, do not change – but origins of these institutions?
Eswaran has a paper on the origin of the caste system in India.
ECON 339: economic behaviour and gender (Eswaran ch 2)
16

Marriage and human capital investment

ECON 339: marriage and human capital investment

What is human capital?
“Schooling, a computer training course, expenditures on medical care, and lectures on the virtues of punctuality and honesty are also capital. That is because they raise earnings, improve health, or add to a person’s good habits over much of his lifetime. Therefore, economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets.”
Becker, http
://
www.econlib.org/library/Enc/HumanCapital.html
(Library of Economics and Liberty)
ECON 339: marriage and human capital investment
2

“Human capital is represented by the aggregation of investments in activities, such as education, health, on-the-job training and migration that enhance an individual’s productivity in the labour market.4 More recently, this concept has been extended to include non-market activities.5 For the purpose of this paper, we define human capital as the aggregation of the innate abilities and the knowledge and skills that individuals acquire and develop throughout their lifetime.”
Laroche*, Mérette, and Ruggeri (1998), http
://
www.fin.gc.ca/pub/pdfs/wp98-01e

ECON 339: marriage and human capital investment
3

Text: no definition, but equates human capital with skills
Focus in economics for a long time was on cognitive skills, and how those affected earnings in labour market
More recently, focus has turned to non-cognitive skills
especially the “big five”personality traits of extraversion, agreeableness, openness, conscientiousness, and neuroticism.
http://psychology.about.com/od/personalitydevelopment/a/bigfive.htm
ECON 339: marriage and human capital investment
4

Why might there be gender differences in human capital acquisition?
1. Laws or social norms dictating differences:
– admission to university, or allowed to graduate from university (Oxford, 1920)
– views of women’s sensitivity, emotional stability, ability for logical reasoning….
…….
2. choices:
– by families: different treatment of sons and daughters
– by individuals: different fields of study
– different levels of education
– different majors
ECON 339: marriage and human capital investment
5

Percentage of women among university graduates, by field of study, 1992 and 2008
Total – Instructional programs 56.4 60.0
Architecture, engineering and related services 17.5 22.2
Mathematics, computer and information sciences 35.2 30.4
Personal, protective and transportation services 18.2 44.9
Business, management and public administration 51.4 53.0
Agriculture, natural resources and conservation 36.7 55.9
Physical and life sciences, and technologies 45.6 57.3
Humanities 63.7 64.3
Visual and performing arts and communication technology 65.9 66.5
Social and behavioural sciences, law 59.3 67.0
Other instructional programs 73.6 69.4
Education 72.6 76.1
Health, parks, recreation and fitness 68.0 77.0
Sources: Statistics Canada, Postsecondary Student Information System, 1992 and 2008.
http://www.swc-cfc.gc.ca/rc-cr/stat/wic-fac-2012/glance-statistical-eng
ECON 339: marriage and human capital investment
6

Market return to human capital?
Data on gender wage gap for full-time employees OECD* countries
Gender wage gap = [median male wage – median female wage]/median male wage]
http://
www.oecd.org/gender/data/genderwagegap.htm

Wag gap varies across occupations

*OECD = The Organisation for Economic Co-operation and Development; 34 countries; founded in 1961
ECON 339: marriage and human capital investment
7

■ The gender wage gap is complex and results from a variety of factors.
■ traditional “women’s work” pays less than traditional “men’s work.”
■ most women workers are employed in lower-wage occupations and lower-paid industries. Women work in a narrower range of occupations than men and have high representation in the 20 lowest-paid occupations.
■ more women than men work part-time.[x] About 70% of part-time workers in 2013 were women, a proportion that has remained steady for three decades.[xi] Women working part-time or temporary jobs are much less likely to receive promotions and training than those in full-time jobs.[xii]
■ A large portion of the wage gap remains unexplained and is partly due to discrimination. An estimated 10-15% of the wage gap is attributed to gender-based wage discrimination.[xiii] Wage discrimination and employment discrimination refer to different things.
http://www.canadianwomen.org/facts-about-the-gender-wage-gap-in-canada
ECON 339: marriage and human capital investment
8

Optimal investment in human capital with high return in market?
Will depend on expectations about time spent in market work.
What raises wages/income? human capital
– through education or experience
Given education, wages typically increase over time in market – so, with age – at a decreasing rate.
So: if women spend less time in the market than men, their wages will be lower
→return to any given level of human capital lower for women than men…..on average.
ECON 339: marriage and human capital investment
9

Suppose men and women had same education, same starting salary at age 20, but women out of labour force ages 30-40 (to raise kids) and could start again with wages when left.
Annual earnings earnings trajectory men:
earnings trajectory women

20 retirement age
ECON 339: marriage and human capital investment
10

Consequences of time out of labour force?
1. Lower lifetime market earnings for women
→return to human capital lower
2. Incentive to invest in human capital for market lower for women than for men, on average
3. Given education costly, a woman who anticipates taking time out of the market will rationally choose to spend less to acquire market human capital than will a man who anticipates staying in market.
ECON 339: marriage and human capital investment
11

Summary?
If women anticipate working less time in the market than men, then they will rationally invest in less market human capital.
If women have lower levels of human capital that the market values, and they are expected to work less, then they will be less valuable for some firms and they will be offered lower wages/fewer jobs.
ECON 339: marriage and human capital investment
12

If men and women are offered different wages for the same jobs, then men may have an absolute advantage in the market sector. Does this mean they also have a comparative advantage, and hence women are more suited to homework than their husbands are?
ECON 339: marriage and human capital investment
13

Market return to marriage?
For men, there seems to be a wage premium for marriage: married men have higher incomes than otherwise identical single men.
Why?
i) marriage makes men more productive in the market: more reliable, less burdened by homework responsibilities (laundry, social life…)? Or
ECON 339: marriage and human capital investment
14

ii) men who have higher market productivity are also more attractive in the marriage market, and are more likely to marry – either because of higher potential earnings, or some third quality that is positively correlated with both market productivity and marriage success.
ECON 339: marriage and human capital investment
15

Evidence?
Mixed, but support for specialization in marriage as causal.
Possible related evidence on the lesbian wage premium:
Wages of never-married lesbians are higher than those of heterosexual women or previously married lesbians. Argument is that never-married lesbians less likely to leave market for marriage, and hence have greater investments in market human capital. Also, some evidence that in lesbian couples there is less specialization.
Daneshvary et al (2009) “Previous Marriage and the Lesbian Wage Premium”, Industrial Relations A Journal of Economy and Society (Impact Factor: 1.48). 06/2009; 48(3):432 – 453. DOI: 10.1111/j.1468-232X.2009.00567.x
ECON 339: marriage and human capital investment
16

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