SE_IE_disentangle - Disentangling the SE and the IE in one...

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Disentangling the SE and the IE in one Diagram Suppose an individual has no non-labor income. Originally the individual works some positive number of hours when the wage equals W1. Suppose now that the wage increases to W2 and the SE dominates the IE. On one graph with income on the vertical axis and leisure on the horizontal axis, graphically depict the IE by itself and the SE by itself in this situation. SE change in hours worked resulting from change in wage, holding utility constant change in H resulting strictly from increase in wage holding utility constant- make individual no better/ no worse off after the wage increase as before (ie- same indifference curve) how to depict SE by itself? need to draw imaginary budget constraint (dotted line) #1) imaginary BC is parallel to BC2 (reflects change in wage from w1 (BC1) to w2 (BC2)) #2) imaginary BC is tangent to IC1 (on same IC- utility is held constant) SE: A→ B (L1→Ls) / ↑W, ↑H, ↓L IE change in hours worked resulting from change in income, holding wage constant
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SE_IE_disentangle - Disentangling the SE and the IE in one...

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