Answer to Question #82383 in Economics of Enterprise for Shaendra

Question

In a typical daily income-leisure choice model, wage rate is increased from $4 per hour to $8 per hour. Assume leisure is a normal good. a. With a conventional indifference curve, analyze the substitution and income effects. b. If income and leisure are perfect 6-for-1 complements, analyze the substitution and income effects. c. If income and leisure are perfect 6-for-1 substitutions, analyze the substitution and income effects.

Answer 1

In a typical daily income-leisure choice model, wage rate is increased from $4 per hour to $8 per hour. Assume leisure is a normal good.

a. When the wage rate increases, there is an increase in the opportunity cost of consuming one more hour of leisure.

b. If income and leisure are perfect 6-for-1 complements, then income effect will be higher than substitution effect.

c. If income and leisure are perfect 6-for-1 substitutions, then substitution effect will be higher than income effect.