In: Economics
Tim has 24 hours a day to spend on either labor (L) or leisure
(H). He earns a wage of $w per hour which he uses for consumption
(C).
a. Write out Tim’s budget constraint.
b. Graph Tim’s budget constraint. Why will the budget constraint
never shift right or left?
c. Suppose Tim currently spends 16 hours per day on leisure, and he
uses the re- maining 8 hours for labor, meaning he spends his
wages, $8w, on consumption each day. Add Tim’s current consumption
of labor and leisure, and his indifference curve, to your graph of
his budget constraint.
d. Suppose Tim’s wage doubles to 2w. Graph a plausible resulting
change in his labor-leisure decision, labeling the substitution and
income effects for both leisure and consumption. Assume leisure is
a normal good.