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1. Consider the problem of allocating your 24 hours in a day between free time and paid work. The (time) budget constraint can be written
1. Consider the problem of allocating your 24 hours in a day between free time and paid work. The (time) budget constraint can be written as: t+wc=24 where t is leisure time chosen, c is consumption and w is the hourly wage. 24 is the total daily hours that can be 'spent'. 1 (a) Draw this budget constraint. Place consumption on the vertical axis and label the points at which your budget constraint crosses the axes, (b) Now assume the government institutes a 'Universal Basic Income' (UBI) - that is it gives everyone $25 per day regardless of whether-and how much - they work. Draw the new budget constraint on the same graph. [HINT: First find the level of consumption at zero hours of work per week]. (c) Redraw your graph from part b). Make it large - as there will be a lot to add on this graph. Draw indifference curves which allow you to mark the old (pre-UBI) and new (post-UBI) optimal allocation of time between leisure and consumption. In both cases assume that optimal consumption is more than 25 dollars. (d) Decompose the change in optimal allocation into the substitution effect and the income effect
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