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2. Assume that workers choose how many hours to work in a day based on the market wage and the way it affects their choice
2. Assume that workers choose how many hours to work in a day based on the market wage and the way it affects their choice to consume either leisure or goods. Suppose they have 16 hours to allocate between leisure and labor. a. Graph (dollar value of goods on the Yaxis, leisure per day on the X axis) an indifference curve and a budget constraint for an individual who chooses to work 6 hours per day in response to a market wage of $10 per hour. Label the intercept values as well as the equilibrium values. (8) b. Now suppose the market wage rises to $15 per hour. Illustrate the substitution and income effects of this wage change, and use a new choice of leisure that is consistent with this change having a larger income effect than substitution effect on leisure demand.(8) c. It is sometimes argued that higher income tax rates will result in people choosing to work fewer hours, because an increase in the income tax is effectively the same thing as a reduction in the wage or the value of an hour of labor. Does our general model of leisure demand and labor supply support this argument? Explain.(9)
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