Exercise 3:

Use a model for the household's trade-off between consumption and leisure to answer the following questions:

a) Use a graph to show the household's optimal solution and then explain your answer in words.

b) Suppose the household has not adapted optimally. Explain such a situation using a diagram and numbers that fit your example. How do you explain that it is not optimal?

c) Discuss the statement:" Statistics show that some people work fewer hours when the real wage rises".

Use a model for the labour market to answer the following question:

d) Use graphs to show the difference between involuntary unemployment and voluntary unemployment and then explain your answer in words.