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

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

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Answer completely.
You will get up vote for sure.

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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Step 1: Define the problem:

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Step 2: 1. Draw budget constraint:

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Step 3: 2. Draw indifference curve:

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