Problem
Suppose you have 24 hours per day that you can allocate between leisure and working. (2 + 3 marks)(i)Draw the budget constraint between "leisure hours" on the horizontal axis and "wage income" on the vertical when the wage rate is $3 per hour. Show an optimum point A. Draw a new budget constraint when the wage rate falls to $2 per hour. Show a new optimum point B.(ii)On your indifference curve diagram, decompose the effect of the wage decrease into a "substitution effect" and an "income effect". What is the direction of the substitution effect (that is, what happens to leisure/work)? Assuming leisure if a "normal good", what is the direction of the income effect? What can you say about the "net effect" of the wage decrease on your leisure choice?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.