2 Analyzing Income and Substitution eects (20 points) In a one period model of Chapter 4, suppose the real wage has decreased, but the non-wage income increases at the same time so that to exactly oset the income eect of the real wage fall. Use carefully labeled charts to show the impact of these changes on the representative consumers optimal choices. Use letters and intervals to clearly label various points and distances in your charts. Your charts must clearly show the following details: a) The income and substitution eects of the real wage change alone. b) The magnitude of the change in the representative households nonwage income which eliminates the income eect of the real wage change. c) The eect of both income changes combined on consumption. d) The eect of both income changes combined on leisure. e) The eect of both income changes combined on labour supply.

2 Analyzing Income and Substitution effects (20 points) In a one period model of Chapter 4, suppose the real wage has decreased, but the non-wage income increases at the same time so that to exactly offset the income effect of the real wage fall. Use carefully labeled charts to show the impact of these changes on the representative consumer's optimal choices. Use letters and intervals to clearly label various points and distances in your charts. Your charts must clearly show the following details: a) The income and substitution effects of the real wage change alone. b) The magnitude of the change in the representative household's non- wage income which eliminates the income effect of the real wage change. c) The effect of both income changes combined on consumption. d) The effect of both income changes combined on leisure. e) The effect of both income changes combined on labour supply