# 1. In the ﬁeld of labor economics interest is paid to an individuals decision regarding the balance of labor and leisure at diEerent levels of

1. In the ﬁeld of labor economics interest is paid to an individuals decision regarding the balance
of labor and leisure at diEerent levels of income. In two—good space, this is typically demon— strated with income {I} on the Y—axis and hours of leisure {L} on the X—asis. Assuming a 24
hour day and that we are interested in per day income, answer the following questions: a) Using a carefully drawn and labeled graph, show the three different “budget” constraints
implied by the following hourly wages: \$5fhr, \$lﬂfhr, and \$15,.I’rhr, and label them I1,
lg, and I3, respectively. b} is the economic interpretation of the slope of the “budget” constraint? c] Give an interpretation of movements to the right (away from the origin) and to the left {toward the origin} on the L {1:} axis {H-int: can we use this axis to say any thing about
hours of labor supplied?). d) In this income—leisure space, we can think about the substitution effect as describing how an individual will substitute towmd more labor as leisure becomes more expensive
{i.e., when the hourly wage increases). While this substitution effect is considered to be consistent, the income elfeet {from increased purchasing power due to higher hourly
wages} can cause a person to either work more, or less. d.1} Using the “budget” constraints from part a], give a graphical example of an indi—
vidual for whom the sum of substitution and income eHect leads to them choosing
bundles where the optimal amount of labor increases from I1 to I; to lg. d2} Using your diagram from d1}, show how these optimal bundles translate to Income[Wage]—
Labor space {supply and demand Space). i.e., Shﬂw how the optimal quantity of labor changes as wage increases. Prm’ide an interpretation of your graph. (nt:
you should see why we think about the supply of labor from individuals, and the demand for labor from firms.) (1.3} Using the “budget” constraints from part a], give a graphical example of an indi—
vidual for whom the sum of substitution and income effect leads to them choosing
bundles where the optimal amount of labor increases from I1 to 12 but decreases
fI’EIlIl I2 130 I3. [1.2] Using your diagram from d3}, show how these optimal bundles translate to Income[Wage}—
Labor space {supply and dEmand space} . i.e., show how the optimal quantity of labor
changes as wage increases. Prcwide an interpretation of your graph.

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