5.8 Joe won $365,000 a year for life in the state lottery.

Use a labor-leisure choice analysis to answer the following questions:

a. Show how Joe’s lottery winnings affect the position of his budget line.

b. After winning the lottery, Joe continues to work the same number of hours each day (see the Application “Working After Winning the Lottery”). What is the income effect from Joe’s lottery gains?

c. Suppose Joe’s employer the same week increases Joe’s hourly wage rate. Use the income effect you derived in part b as well as the substitution effect to analyze whether Joe chooses to work more hours per week. (Hint: See Solved Problem 5.6.)