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Consider the figure to the right, where Joe initially maximizes utility at consumption-leisure combination R along budget constraint L¹. Suppose Joe's wage is cut in half. 1.) Use the line drawing tool to draw Joe's new budget constraint with the lower wage. Label this line 'L²₁ 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 fewer hours. The income effect causes Joe to work the same number of hours. The combined income and substitution effects cause Joe to work the same number of hours. Income (Market value of goods) per day 240- 220- 200- 180- 160- 140- 1 +2¹ 120- 100- 80- 60- ........ 40- 130 20- 0- 0 2 4 R 75 ₁4 3 +12 6 8 10 12 14 16 18 20 22 24 26 Leisure hours per day Q Q

Consider the figure to the right, where Joe initially maximizes utility at consumption-leisure combination R along budget constraint L¹. Suppose Joe's wage is cut in half. 1.) Use the line drawing tool to draw Joe's new budget constraint with the lower wage. Label this line 'L²₁ 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 fewer hours. The income effect causes Joe to work the same number of hours. The combined income and substitution effects cause Joe to work the same number of hours. Income (Market value of goods) per day 240- 220- 200- 180- 160- 140- 1 +2¹ 120- 100- 80- 60- ........ 40- 130 20- 0- 0 2 4 R 75 ₁4 3 +12 6 8 10 12 14 16 18 20 22 24 26 Leisure hours per day Q Q

Microeconomic Theory
Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter6: Demand Relationships Among Goods
Section: Chapter Questions
Problem 6.9P
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Consider the figure to the right, where Joe initially maximizes utility at consumption-leisure combination R along budget constraint L¹. Suppose Joe's wage is cut in half. 1.) Use the line drawing tool to draw Joe's new budget constraint with the lower 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 fewer hours. The income effect causes Joe to work the same number of hours. The combined income and substitution effects cause Joe to work the same number of hours. Income (Market value of goods) per day 240- 220- 200- 180- 160- 140- HL 120- 100- 80- 60- 40- 20- 0- 30 2 4 R # Toffe 4 .3 6 8 10 12 14 16 18 20 22 24 26 Leisure hours per day
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 is cut in half. 1.) Use the line drawing tool to draw Joe's new budget constraint with the lower 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 fewer hours. The income effect causes Joe to work the same number of hours. The combined income and substitution effects cause Joe to work the same number of hours. Income (Market value of goods) per day 240- 220- 200- 180- 160- 140- HL 120- 100- 80- 60- 40- 20- 0- 30 2 4 R # Toffe 4 .3 6 8 10 12 14 16 18 20 22 24 26 Leisure hours per day
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