1) Tom has 24 hours at his disposal but 8 hours out of that are used for sleep and other necessary activities. So, he can allocate 16 hours between work and leisure. That is, Tom's work hours (W) is 16 - Hours of Leisure (L). When he works, he earns $10 per hour and he has no other sources of income.

a) Using the concept of budget constraint, draw the constraint he faces when he tries to find utility maximizing choices between income and leisure on Income-Leisure plane. Please put leisure on X-axis. (Hint: the number hours of leisure is 16 and maximum feasible work hours is also 16)

b) If Tom's utility function is U(I, L) = I*L where I = income and L = leisure. Draw the indifference curve map on the Income-Leisure plane.

2) Find the utility maximizing choice of Tom. How many hours will he work? How much does he earn per day as a result?

3) Now suppose that Tom got a raise and his hourly rate now is $12 per hour. How many hours will Tom work? Using graphs, illustrate the change it may cause on Tom's choice of work hours and income.

4) Can you identify the income effect and the substitution effect of this change?