Chapter 2, Problem 1QS

To determine

Indifference curve and budget line in the work-leisure model.

Explanation of Solution

An indifference curve in work-leisure model represents the combination of real income and leisure time that provide the same level of satisfaction to the worker.

In work-leisure model, budget line represents all possible combinations of real income and leisure that the worker obtained from the given wage rate.

The indifference curve is downward sloping, which means that it is negatively sloped because the workers are willing to give up leisure time in order to get more income and maintain equal satisfaction. If the time spent on leisure is reduced, income will increase. Thus, the indifference curve will be downward sloping.

Another major feature is that indifference curve is convex to the origin. The convexity implies that the marginal rate of substitution between income and leisure time decreases as a worker moves along the indifference curve, where the marginal rate of substitution indicates that one is given up for another. Thus, the indifference curve is convex to the origin.

The graphical representation of indifference curve and budget line is represented as follows:

In the figure, the horizontal axis represents hours of leisure and work and the vertical axis represents income. The downward sloping curve is the budget line of the worker. IC1, IC2, and IC3 are the indifference curves. The tangent point of budget constraints and indifference curve indicates the optimal choice. Thus, in the figure, U1 is the optimal point, where the worker will work for 8 hours per day and 16 hours spend for leisure in order to get $16 each day.