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Econ_102A_PS4_Answer - Problem Set 4 Solutions Econ 102A#1...

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Problem Set 4 Solutions Econ 102A #1.) Consider a consumer making wage w endowed with T units of time. The consumer can divide his time between working (labor) and playing (leisure). a) Under the assumption that the consumer will spend all of his income on consumption goods, write down the budget constraint for this individual. I=C=w(Ls)=w(T-l) where Ls is labor supply and l is leisure, Ls=T-l. b) In consumption-leisure space, draw the budget constraint labeling all intercepts and slopes. c) Draw an indifference curve tangent to the consumer’s budget constraint and indicate the optimal amount of leisure. How much labor is supplied?
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d) Now suppose the wage decreases. Show the following two scenarios: i) The income effect dominates the substitution effect. Will the consumer work more or less? ii) The substitution effect dominates the income effect. Will the consumer work more or less? e) Using your results from part d), explain graphically what an individual’s labor supply curve looks like.
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