Leandro has 16 hours per day that he can allocate to work or leisure. His job pays a wage rate of $20. Leandro decides to consume 8 hours of leisure. His indifference curves have the usual shape: they slope downward, they do not cross, and they have the characteristic convex shape.
a. Draw Leandro's time allocation budget line for a typical day. Then illustrate the indifference curve at his optimal choice.
Now Leandro's wage rate falls to $10.
b. Draw Leandro's new budget line.
c. Suppose that Leandro now works only 4 hours as a result of his reduced wage rate.
Illustrate the indifference curve at his new optimal choice.
d. Leandro's decision to work less as the wage rate falls is the result of a substitution effect and an income effect. In your diagram, show the income effect and the substitution effect from this reduced wage rate. Which effect is stronger?