The budget constraint between leisure hours
Question # 00541151
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Updated on: 06/06/2017 04:03 AM Due on: 06/06/2017
Suppose you have 24 hours per day that you can allocate between leisure and working.
(a) Draw the budget constraint between “leisure hours” on the horizontal axis and
“wage income” on the vertical when the wage rate is $3 per hour. Mark an
optimum point A that is meaningful. Draw a new budget constraint when the
wage rate falls to $2 per hour. Show a new optimum point B.
(a) Draw the budget constraint between “leisure hours” on the horizontal axis and
“wage income” on the vertical when the wage rate is $3 per hour. Mark an
optimum point A that is meaningful. Draw a new budget constraint when the
wage rate falls to $2 per hour. Show a new optimum point B.
(b) On your indifference curve diagram, decompose the effect of the wage decrease
into a “substitution effect” and an “income effect” (What is the direction of the
substitution effect, that is, what happens to leisure or work? Assuming leisure if
a “normal good”, what is the direction of the income effect?) What can you say
about the “net effect” of the wage decrease on your leisure choice? Also provide
economic explanations of your decomposition results.
into a “substitution effect” and an “income effect” (What is the direction of the
substitution effect, that is, what happens to leisure or work? Assuming leisure if
a “normal good”, what is the direction of the income effect?) What can you say
about the “net effect” of the wage decrease on your leisure choice? Also provide
economic explanations of your decomposition results.
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Rating:
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Solution: The budget constraint between leisure hours