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Neoclassical microeconomic model � Supply

See also: Labour supply

The neoclassical model analyzes the trade-off between leisure hours and working
hours

Railroad work.
Households are suppliers of labour. In microeconomic theory, people are assumed to
be rational and seeking to maximize their utility function. In the labour market
model, their utility function expresses trade-offs in preference between leisure
time and income from time used for labour. However, they are constrained by the
hours available to them.

Let w denote the hourly wage, k denote total hours available for labour and
leisure, L denote the chosen number of working hours, p denote income from non-
labour sources, and A denote leisure hours chosen. The individual's problem is to
maximise utility U, which depends on total income available for spending on
consumption and also depends on time spent in leisure, subject to a time
constraint, with respect to the choices of labour time and leisure time:

{\displaystyle {\text{maximize}}\quad U(wL+\pi ,A)\quad {\text{subject to}}\quad


L+A\leq k.} {\text{maximize}}\quad U(wL+\pi ,A)\quad {\text{subject to}}\quad
L+A\leq k.
This is shown in the graph below, which illustrates the trade-off between
allocating time to leisure activities and allocating it to income-generating
activities. The linear constraint indicates that every additional hour of leisure
undertaken requires the loss of an hour of labour and thus of the fixed amount of
goods that that labour's income could purchase. Individuals must choose how much
time to allocate to leisure activities and how much to working. This allocation
decision is informed by the indifference curve labelled IC1. The curve indicates
the combinations of leisure and work that will give the individual a specific level
of utility. The point where the highest indifference curve is just tangent to the
constraint line (point A), illustrates the optimum for this supplier of labour
services.

If consumption is measured by the value of income obtained, this diagram can be


used to show a variety of interesting effects. This is because the absolute value
of the slope of the budget constraint is the wage rate. The point of optimisation
(point A) reflects the equivalency between the wage rate and the marginal rate of
substitution[3] of leisure for income (the absolute value of the slope of the
indifference curve). Because the marginal rate of substitution of leisure for
income is also the ratio of the marginal utility of leisure (MUL) to the marginal
utility of income (MUY), one can conclude: