
- Leandro’s time allocation budget line and indifference curve at optimal choice.
- Leandro’s new budget line due to change in wage rate.
- Leandro’s indifference curve at optimal choice due to change in wage rate.
- Income and substitution effect.
Concept Introduction:
Indifference curve − An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. It represents how much value an individual receives from various combinations of consumption. An individual does not have just one indifference curve. They will have an identically shaped curve at different level of incomes.
Budget line on the other hand is graphical representation of all possible combination of two goods which can be purchased with a given income and prices.

Explanation of Solution
If Leandro spends all of his time working his total income will be 16 x $20 = $320. But if Leandro spends all of his time in leisure he will not have any income. This would give us a time allocation budget line labelled as BL. Now since Leandro decides to consume 8 hours of leisure, he will work for remaining 8 hours a day and have an income of $160. That is Leandro gives up $20 for every hour in which he consumes leisure. The indifference curve in this situation will be tangent to the allocation budget line BL at point A, as given in the diagram below.
As Leandro’s wage rate falls to $10, he might work for 16 hours a day as spending 8 hours on leisure will reduce his total income from $160 (16 x $10) to $80. Considering the substitution effect, Leandro will consume less leisure as the
opportunity cost of leisure will be expensive and substitution effect states that goods which are less expensive will be selected by an individual. In such a situation, the budget line will be represented by a new budget line BL1.If Leandro spends only 4 hours at work due to his reduced wage rate, his total income will be $40. That is, he spends 12 hours a day as leisure time and works for only 4 hours. The indifference curve in such a situation will be tangent to budget line BL1,at point B, as he is working for half the time at the reduced wage rate (i.e at $10 he was working for 8 hours initially and has now reduced his work hours by half the time, 4 hours).
In the above diagram we see that, when Leandro was working for 16 hours a day his total income at the wage rate of $20 was $320. However, he decided to substitute 8 hours of work with leisure and was earning an income of $160. This was due to the income effect. Income effect states that an increase in the wage rate of an individual will lead to an increase in the quantity of goods demanded. That means an increase in Leandro’s income will induce him to spend more time on leisure. When Leandro’s wage rate reduced to $10 per hour, his total income was $40 because of reduced hours of work. This was due to reduced opportunity cost. Leandro had to sacrifice only $10 per hour as compared to $20 for leisure. However, reducing the work hours along with reduced wage rate resulted in Leandro becoming poorer, so he should consume less leisure as it is a normal good. Since the overall consumption has increased from 8 hours to 12 hours, the substitution effect dominates effect.
Want to see more full solutions like this?
Chapter 19A Solutions
Microeconomics:
- Explain how much of emotional, mental and physical toll makes it so difficult to break the cycle of poverty.arrow_forwardCase Study: The Impact of Ebola on Tax Revenue in the DRC Background: The Democratic Republic of the Congo has experienced mulitiple outbreaks, with the 2018-2020 outbreak being one of the most severe. The outbreak had profound effects on public health, the economy and government operations. The DRC's economy already fragile due to policital instability and conflict, faced additional stain as the Ebola virus spread across several provinces. Economic disruption: The Ebola outbreak led to significant disruptions in the affected regions. Businesses were forced to close or reduce operations due to quarantine measures and the fear of contagion. this resulted in a sharp decline in economic activities, particularly in sectors such as agriculute, mining and trade. reduced consumer spending and interruptions in supply chains further exacerbated the economic downturn. Impact on Tax Revenue: the economic…arrow_forwardKey shortcomings of the Human Capital approach to measuring the monetary value of benefits of new treatments are that it Will generate lower benefits for male lives on average Will generate higher benefits for female lives on average Will tend to OVERVALUE improvements in quality of life Will tend to UNDERVALUE improved survival for people out of labour forcearrow_forward
- One of the key concepts in economics that underpins the necessity of making tough choices and confronting difficult tradeoffs through some form of collective decision-making is called Production Consumption Exchange Equity Scarcityarrow_forwardAllocative efficiency WITHIN the health care sector refers to What mix of nonmedical and medical goods and services should be produced in the macro-economy What mix of medical goods and services should be produced in the health economy What specific health care resources should be used to produce the chosen medical goods and services Who should receive the medical goods and services that are producedarrow_forwardProduction efficiency is most concerned with Choice of inputs in production process Quantity of outputs resulting from the production process The technological process of production All of the abovearrow_forward
- Choose all of the following that are assumed to be constant while constructing the production possibilities curve Technology Precise mix of inputs Institutional arrangements like judicial protection of business contracts Outputsarrow_forwardA point that lies OUTSIDE of the PPC can be achieved if A major technological innovation increases production efficiency A sudden influx of resources e.g., massive immigration of trained nurses Economic reform resulting in greater protection of intellectual property rights All of the above Only options 1 and 2arrow_forwardThe marginal benefit from each successive unit of medical care consumed declines BECAUSE each successive unit is more expensive to produce True Falsearrow_forward
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education





