5-4 - ECDN215 Assignment 5 Be Tom Sawyer Hours of...

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Unformatted text preview: ECDN215 Assignment 5: Be - Tom Sawyer Hours of leisure {to a maximum of 24 per day} is measured on the int-axis. Hours of work by Tom = 24 - hours of leisure. The Y-axis measures income in $5. If Tom worked 24 hrsi'day at $1Dlhr. his max. ore-tax income would be $240. After the 20% tax is paid, Tom’s max. disgosable income [post-tax} = $192. {yellow line}. Suppose he chooses point A [about 9 hrs work}. If the wage rate falls to $8 fhr. Tom‘s income- leisure-budget line gets flatter [pink line}. See the lowest budget line: BEE. -Tax It is reasonable that after the wage rate decrease Tom could still “consume” the same amount of leisure at point B {8‘ hence *work the same hours}. See EC cunres US 8. U1. This would be true if, & only if. the income effect of the decrease in the wage on Tom’s leisure choice is exactly offset the substitution effect 12 l 13 2;; on his leisure choice. Hours of leisure ...
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