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Leandro has 16 hours per day that he can allocate to work or leisure His job pays a wage rate of $20. Leandro decides to consume 8 hours of leisure His indifference curves have the usual shape

Leandro has 16 hours per day that he can allocate to work or leisure. His job pays a wage rate of $20. Leandro decides to consume 8 hours of leisure. His indifference curves have the usual shape: they slope downward, they do not cross, and they have the characteristic convex shape. a. Draw Leandro s time allocation budget line for a typical day. Then illustrate the indifference curve at his optimal choice. Now Leandro s wage rate falls to $10. b. Draw Leandro s new budget line. c. Suppose that Leandro now works only 4 hours as a result of his reduced wage rate. Illustrate the indifference curve at his new optimal choice. d. Leandro s decision to work less as the wage rate falls is the result of a substitution effect and an income effect. In your diagram, show the income effect and the substitution effect from this reduced wage rate. Which effect is stronger?

Apr 03 2020 View more View Less

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