Consider the figure to the right, where Joe initially maximizes utility at consumption-leisure combination R along budget constraint L¹. Suppose Joe's wage doubles. 1.) Use the line drawing tool to draw Joe's new budget constraint with the higher wage. Label this line 'L². 2.) Use the point drawing tool to identify the new utility-maximizing consumption- leisure bundle for Joe. Label this point 'T'. Carefully follow the instructions above, and only draw the required objects. The substitution effect causes Joe to work The income effect causes Joe to work hours. hours. The combined income and substitution effects cause Joe to work hours. Income (Market value of goods) per day 240- 220- 200- 180- 160- 140- 1 120- 100- 5 80- £2 R 60- 3 40- 20- 1 0- -0 0 -2 4 6 8 10 12 14 16 18 20 22 24 26 Leisure hours per day
Consider the figure to the right, where Joe initially maximizes utility at consumption-leisure combination R along budget constraint L¹. Suppose Joe's wage doubles. 1.) Use the line drawing tool to draw Joe's new budget constraint with the higher wage. Label this line 'L². 2.) Use the point drawing tool to identify the new utility-maximizing consumption- leisure bundle for Joe. Label this point 'T'. Carefully follow the instructions above, and only draw the required objects. The substitution effect causes Joe to work The income effect causes Joe to work hours. hours. The combined income and substitution effects cause Joe to work hours. Income (Market value of goods) per day 240- 220- 200- 180- 160- 140- 1 120- 100- 5 80- £2 R 60- 3 40- 20- 1 0- -0 0 -2 4 6 8 10 12 14 16 18 20 22 24 26 Leisure hours per day
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider the figure to the right, where Joe initially maximizes utility at
consumption-leisure combination R along budget constraint L¹.
Suppose Joe's wage doubles.
1.) Use the line drawing tool to draw Joe's new budget constraint with the higher
wage. Label this line 'L².
2.) Use the point drawing tool to identify the new utility-maximizing consumption-
leisure bundle for Joe. Label this point 'T'.
Carefully follow the instructions above, and only draw the required objects.
The substitution effect causes Joe to work
The income effect causes Joe to work
hours.
hours.
The combined income and substitution effects cause Joe to work
hours.
Income (Market value of goods) per day
240-
220-
200-
180-
160-
140-
1
120-
100-
5
80-
£2
R
60-
3
40-
20-
1
0-
-0
0
-2
4
6
8 10 12 14 16 18 20 22 24 26
Leisure hours per day
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