Assignment:
Part I : Short-answer questions. Use complete sentences to answer each question concisely.
1.In the context of work-leisure models:
(1) What information is provided in (a) an indifference curve and (b) the budget line in the work-leisure model?
(2) Why are indifference curves (a) downward-sloping and (b) convex to the origin? Draw several indifference curves and a single budget line and illustrate a worker optimal position.
2.Explain what is meant by income and substitution effects of a change in the wage rate. In which direction do these effects go? If the income effect is more powerful than the substitution effect, what will the individual labor supply curve look like?
3.On a labor-leisure diagram, illustrate the impact on desired hours of work resulting from an increase in non-wage income. Assume leisure is a normal good.
4.Indicate in each of the following instances whether the specified circumstances will cause a worker to want to work more of fewer hours. [Substitution Effect = SE; Income Effect = IE]
a) the wage rate increases and the SE is greater than the IE.
b) the wage rate decreases and the IE is greater than the SE.
c) the wage rate decreases and the SE is greater than the IE.
d) the wage rate increase and the IE is greater than the SE.