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Jackson has $20 of passive income every day. Additionally, he may devote 18 hours of his day to leisure or labor. He makes $10
Jackson has $20 of passive income every day. Additionally, he may devote 18 hours of his day to leisure or labor. He makes $10 an hour for the first 8 hours of his shift. However, he makes $15 an hour after the 8th hour. His preferences are represented by the utility function: U (X,Y)= XY, where X is the amount of money he spends on consumer goods (in dollars) and Y is the amount of time he devotes to leisure (in hours). a) Draw Jackson's budget constraints and indifference curves and solve for his leisure choices and optimal consumption. b) Suppose that Jackson now makes $11 per hour for the first 8 hours of his shift. His wage after the first 8 hours remains the same ($15). Find his optimal consumption. Break down the total change in demand due to a price change into an income effect, ordinary income effect, substitution effect, and endowment income effect. Demonstrate each effect graphically.
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Step 12 To solve for Jacksons leisure choices and optimal consumption we need to first draw his budget constraint and indifference curves The budget constraint represents the different combinations of ...Get Instant Access to Expert-Tailored Solutions
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