Tim has 24 hours a day to spend on either labor (L) or leisure (H). He...

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.

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Rahul Sunny answered 1 year ago

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