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Suppose an individual has 40 hours to work. Suppose also the individual has a net wealth outside the labor market of 100$. Suppose the wage rate is equal to 10 $ per hour. Graph the budget constraint. Suppose the marginal rate of substitution between consumption (C) and leisure (l) is equal to C/l . What will a utility maximizing consumer choice between labor and consumption be? Suppose the wage falls to 5$ per hour. What is the new choice of labor vs. consumption. Interpret this in terms of substitution and income effects. Use a graph to do this.
[Note: if both of these numbers lie at the border of what is feasible for the consumer to choose, feel free to increase the number of hours in the model.]
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