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.
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.
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
de
creases. 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.
Please help me solve 6 e and illustrate on a diagram so I can better understand it please thank you.
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