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c05Thetheoryofdemand.qxd 7/23/10 8:51 AM Page 187

5.5 THE CHOICE OF LABOR AND LEISURE 187

Demand
Annual membership price $1,500 A C B FIGURE 5.23 Negative Network

$1,200
Externality: Snob Effect
What happens to the demand for
membership in a fitness club if the
$1,900
annual membership charge falls from
$1,200 to $900? Without network
$1,600
D
1000
would increase the membership by
effect
$1,300 Snob D 1300 externalities, the pure price effect
800 (from 1,000 to 1,800). But this
increase in membership would discour-
age some people from joining. This
0
1000 1300 1800 negative externality (a snob effect)
leads to a reduction of 500 members
Pure price effect (from 1,800 to 1,300). The net effect
Q, number of memberships of the price reduction is therefore an
increase of 300 members.

As we have already seen, the model of optimal consumer choice has many everyday 5.5
applications. In this section, we use that model to examine a consumer’s choice of how THE CHOICE
much to work.
OF LABOR
AND LEISURE
AS WAGES RISE, LEISURE FIRST DECREASES,
THEN INCREASES

Let’s divide the day into two parts: the hours when an individual works and the hours
when he pursues leisure. Why does the consumer work at all? Because he works, he
earns an income, and he uses the income to pay for the activities he enjoys in his
leisure time. The term leisure includes all nonwork activities, such as eating, sleeping,
recreation, and entertainment. We assume that the consumer likes leisure activities.
Suppose the consumer chooses to enjoy leisure for L hours per day. Since a day
has 24 hours, the time available for work will be the time that remains after leisure,
that is, 24 L hours.
The consumer is paid an hourly wage rate w. Thus, his total daily income will be
w(24 L). He uses the income to purchase units of a composite good at a price of
$1 per unit.
The consumer’s utility U depends on the amount of leisure time and the number
of units of the composite good he can buy. We can represent the consumer’s decision
on the optimal choice diagram in Figure 5.24. The horizontal axis represents the
number of hours of leisure each day, which can be no greater than 24 hours. The ver-
tical axis represents the number of units of the composite good that he purchases from
his income. Since the price of the composite good is $1, the vertical axis also measures
the consumer’s income.
To find an optimal choice of leisure and other goods, we need a set of indifference
curves and a budget constraint. Figure 5.24 shows a set of indifference curves for
which the marginal utility of leisure and the composite good are both positive. Thus
U U U U U .
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