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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)

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)

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Please help me solving the following sub question please inform me of what the elements of the diagram you draw mean please.

I added a diagram just to possibly help you solve the question but I am not sure if it is correct please label the diagram you complete so I can understand fully.

Thank you

 

Only 6 c please 

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