Question

(10) A person earns a wage $10 per hour and has 100 hours per week to allocate between leisure and work. At the $10 wage, the person chooses to consume 65 hours of leisure per week.

a.  Draw the labor-leisure graph showing the situation described above. Make sure to label all intercepts, axis, and relevant slopes in your graph.

b.The wage increases to $15 per hour.  Assume the substitution effect exceeds the income effect.  Show on your graph whether the person works more or less with the wage increase.

c.You receive a $50 weekly cash allowance from a college scholarship fund.  Show the effect of the scholarship on your budget constraint. Do you work more, less, or the same? Explain.

Answer 1

a) If person works for 35 hours he get 350 in income and 65 hours in Leisure which depicts the Budget constraint in the below diagram.

b) When the wage rises to $15, the budget constraint shifts rightward toward income from labour. Now the income level is 525. The indifference curve is also shifted rightwards which shows the income and substitution effect in the diagram. Person works approximately the same when the income rises to $15, labour hours rises but after some level of working hard, they increase their leisure hours.

c) If you get a $50 weekly cash allowance which is one time payment which shifts your budget constraint rightwards by $50. The consumption of labour as well as leisure rises.