1. Julie can choose to work for as many hours she likes, at a constant wage of $15 per hour. She uses her wages for consumption. She doesn't like to

work (she prefers free time), but she does like consumption. [20%]

(a) Plot Julie's budget constraint on a graph with free time on the x-axis and consumption on the y-axis. Illustrate Julie's optimal combination by drawing at least one of Julie's indifference curve.

(b) Suppose now that Julie gets a raise at work. She now receives $17 per hour. Illustrate this change on your graph, including the new optimal point after her change in wages.

(c) Demonstrate graphically the substitution and income effects in this scenario. Based on your graph, identify the direction of each of these effects for each of the two goods. Based on your graph, what is the net effect on Julie's free time?

(d) Suppose you know that Julie received a wage increase from $15 to $17 per hour, but you do not know her indifference curves. Can you say anything about the direction of the substitution effect, income effect, and the net effect on her free time?