Wage rate change optimal consumption-leisure combination

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Reference no: EM131245956

Using neo-classical model of labor-leisure choice to answer the following questions. (You need to verify your answers using graphs and arguments.)

a. How does an increase in wage rate change the optimal consumption-leisure combination chosen by the worker? State income effect and substitution effect.

b. Suppose the government grants $1000 to women who are completely out of the labor force. If this eligible woman gets a job in labor market, government takes away 50 cents from the cash grant for every dollar earned by the woman. Wage rate in labor market is $10 per hour. How does this welfare program create work disincentives for women? (hint: compare optimal choice before and after the program being effective).

Reference no: EM131245956

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