Please help me to solve question 6 E as I am haivng a little bit of a hard time fsolving it. Thank you 6.Assume you can work as many hoursyou wish at £12 per hour (net of tax). If you do not work you have noincome. You have no ability to borrow or lend, so your consumption, c, issimply equal to your income.a) Derive and plot the feasible set, between daily values of consumption c,and "leisure", I. Label the values at the intercepts (the points where thefeasible frontier cuts the two axes).b) Assume that your optimal choice of consumption and leisure is to work 8hours per day. Illustrate this choice diagrammatically using the feasible setand indifference curves.c) Use indifference curves and the feasible set to show why, given theproperties of the optimal choice in part b), it is not optimal to work, say,10, or 6 hours per day. (continued on next slide)6. (continued)d) Now assume that you receive an income of £140 per week from anunknown benefactor. Show the impact on your feasible set (nb: be morecareful than Stephen was in his diagrams in Autumn Week 5!), and show anew optimal choice in which consumption increases but labour supplydecreases. Using the concept of the marginal rate of substitution, explainwhy this is a likely outcome.e) Now assume that, starting from the optimal point in d), your wageincreases to £18 per hour. Explain why the impact of this change isambiguous, and relate to the long-run historical experience of wagegrowth in rich countries. IC,300Substitutioneffect22515075IncomeeffectOveralleffect1012141618202224Hours of free timeThe sum of the income and substitution effectsThe overall effect of the wage rise depends on the sum of the income and substitutioneffects. In this case the substitution effect is bigger, so with the higher wage you take lessfree time.Figure 3.19b The effect of a wage rise on your choice of free time and consumption.Consumption ($)C.

The purpose of this question is to explain the consumption leisure trade off to answer this…

6. Assume you can work as many hours you wish at £12 per hour (net of tax). If you do not work you have no income. You have no ability to borrow or lend, so your consumption, c, is simply equal to your income. a) Derive and plot the feasible set, between daily values of consumption c, and "leisure", I. Label the values at the intercepts (the points where the feasible frontier cuts the two axes). hl. Assume that your optimal choice of consumption and leisure is to work 8

6. Assume you can work as many hours you wish at £12 per hour (net of tax). If you do not work you have no income. You have no ability to borrow or lend, so your consumption, c, is simply equal to your income. a) Derive and plot the feasible set, between daily values of consumption c, and "leisure", I. Label the values at the intercepts (the points where the feasible frontier cuts the two axes). hl. Assume that your optimal choice of consumption and leisure is to work 8

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Please help me to solve question 6 E as I am haivng a little bit of a hard time fsolving it.

Thank you

6.
Assume you can work as many hours
you wish at £12 per hour (net of tax). If you do not work you have no
income. You have no ability to borrow or lend, so your consumption, c, is
simply equal to your income.
a) Derive and plot the feasible set, between daily values of consumption c,
and "leisure", I. Label the values at the intercepts (the points where the
feasible frontier cuts the two axes).
b) Assume that your optimal choice of consumption and leisure is to work 8
hours per day. Illustrate this choice diagrammatically using the feasible set
and indifference curves.
c) Use indifference curves and the feasible set to show why, given the
properties of the optimal choice in part b), it is not optimal to work, say,
10, or 6 hours per day. (continued on next slide)
6. (continued)
d) Now assume that you receive an income of £140 per week from an
unknown benefactor. Show the impact on your feasible set (nb: be more
careful than Stephen was in his diagrams in Autumn Week 5!), and show a
new optimal choice in which consumption increases but labour supply
decreases. Using the concept of the marginal rate of substitution, explain
why this is a likely outcome.
e) Now assume that, starting from the optimal point in d), your wage
increases to £18 per hour. Explain why the impact of this change is
ambiguous, and relate to the long-run historical experience of wage
growth in rich countries.

IC,
300
Substitution
effect
225
150
75
Income
effect
Overall
effect
10
12
14
16
18
20
22
24
Hours of free time
The sum of the income and substitution effects
The overall effect of the wage rise depends on the sum of the income and substitution
effects. In this case the substitution effect is bigger, so with the higher wage you take less
free time.
Figure 3.19b The effect of a wage rise on your choice of free time and consumption.
Consumption ($)
C.

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