Utility-maximizing indifference curve

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Assignment:

Consider an individual who initially works T-L0 hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income.

a) Draw a graph that reflects this individual's income-leisure constraint, utility-maximizing indifference curve (U0) and choice of leisure hours (L0).

b) The government then implements a wage subsidy program in which worker wages are increased by 10%. This wage subsidy program has no limits, so there is no phase-in/out. This wage subsidy produces both an income effect and a substitution effect on the worker's choice of leisure hours. Assume that the substitution effect is stronger than the income effect.

On the same graph as part a, draw this individual's new income-leisure constraint, utility-maximizing indifference curve (US) and choice of leisure hours (LS).

[Note: When incorporating the 10% wage subsidy into the graph in part b, I am not expecting perfect precision. Just try your best to draw the new income-leisure constraint as though a 10% wage subsidy has been added.]

Reference no: EM133412081

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