What is the price of leisure

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Suppose Lorne has 20 hours per day that can be spent either working or at "leisure". Assume (at least initially) that Lorne earns all income from working at the after-tax wage rate of $10/hour.

(a) Using an indifference curve, illustrate Lorne's decision if he decides to work 10 hours per day. Calculate, and in your diagram, identify, Lorne's quantity of leisure, supply of labour, and consumption. What is the price of leisure?

(b) If the wage fell to $5/hour and Lorne continued to work 10 hours per day, what would his decision tell us about whether leisure is normal or inferior for Lorne? What would it tell us about the relative strength of the substitution and income effects of the wage decrease?

Reference no: EM13876230

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