Labor-Leisure choice. Uses 80 hour maximum work week. Utility = R3C2 R = leisure C = dollar amount of income for consumption Budget Line 1: Wage = $16 per hour. No other income. Draw the Labor-Leisure diagram, including the budget line. Solve the point of optimization, and label it point A. Draw the indifference curve. Label it U1 Budget Line 2: Wage = $22 per hour. No other income. Draw the budget line for this new $22 wage. Solve the point of optimization, and label it point B. Draw the indifference curve. Label it U3 Use an auxiliary budget line to separate the income effect from the substitution effect. Identify the substitution effect as point S. Draw the indifference curve. Label it U2 The point of optimization for part C can be labeled, rather than numerically solved, as long as the drawn answers show expected results for two normal goods.
Labor-Leisure choice. Uses 80 hour maximum work week. Utility = R3C2 R = leisure C = dollar amount of income for consumption Budget Line 1: Wage = $16 per hour. No other income. Draw the Labor-Leisure diagram, including the budget line. Solve the point of optimization, and label it point A. Draw the indifference curve. Label it U1 Budget Line 2: Wage = $22 per hour. No other income. Draw the budget line for this new $22 wage. Solve the point of optimization, and label it point B. Draw the indifference curve. Label it U3 Use an auxiliary budget line to separate the income effect from the substitution effect. Identify the substitution effect as point S. Draw the indifference curve. Label it U2 The point of optimization for part C can be labeled, rather than numerically solved, as long as the drawn answers show expected results for two normal goods.
Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter7: Taking The Nation's Economic Pulse
Section: Chapter Questions
Problem 17CQ
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Labor-Leisure choice. Uses 80 hour maximum work week. Utility = R3C2
R = leisure
C = dollar amount of income for consumption
Budget Line 1: Wage = $16 per hour. No other income.
Draw the Labor-Leisure diagram, including the budget line. Solve the point of optimization, and label it point A. Draw the indifference curve. Label it U1
Budget Line 2: Wage = $22 per hour. No other income. Draw the budget line for this new $22 wage. Solve the point of optimization, and label it point B. Draw the indifference curve. Label it U3
Use an auxiliary budget line to separate the income effect from the substitution effect. Identify the substitution effect as point S. Draw the indifference curve. Label it U2 The point of optimization for part C can be labeled, rather than numerically solved, as long as the drawn answers show expected results for two normal goods.
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