Income-leisure choice of Workers
Application of Indifference Curve on Income-Leisure choice of worker
The application of indifference curve analysis exists in the case of the income leisure choice of workers. Suppose that the utility function of an individual worker is given as;
U= F(M,L)
Where
U= Utility
M= Money income from work
L= Leisure
An individual divides his daily time between work and leisure to maximize his utility function. If an individual increases his hours of work, his income increases but his hours of leisure decrease and vice-versa. So, income and leisure are like substitutes for one another. It is explained by using an indifference curve technique as shown below figure:
In the above figure, hours of leisure are measured along the x-axis, and money is measured along the y-axis respectively. MH is an income leisure line and IL denotes the income-leisure trade-off curve. Suppose the total hours available to the labour is OH and the hourly wages rate is ‘W’. If the labour enjoys no leisure, his income would be OM= OH*W and the wage rate (W)= OM/OH, which is the slope of income- leisure curve MH. The equilibrium of labour is determined at point E where the income-leisure line is tangent with his income-leisure trade-off curve. With the combination of income OP, leisure hours ON and working hours NH, the worker is maximizing his utility function at point E where the labour earns money income ‘OP’ by working ‘NH’ hours and takes leisure hours of ‘ON’.
