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Notes: > A. In all questions below, assume goods can be bought and consumed in continuous (fractional) quantities. > B. Give values where any budget

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Notes: > A. In all questions below, assume goods can be bought and consumed in continuous (fractional) quantities. > B. Give values where any budget constraint touches either axis. Make up numbers on the two axes for utility maximization points that you choose, but ensure these satisfy the budget constraint they are on. > C. When you are asked to show a change in a graph, make sure to clearly indicate which line is the new one (e.g., by indicating the direction of change with an arrow). > 1. Substitution and Income Effects of a Wage Cut. The graph below shows Adam's daily endowment point and budget line. His real wage is 15 units of consumption per hour (i.e., $15 per hour, where we normalize the price of consumption goods to $1 per unit). There is no higher wage for overtime pay, and no taxes or subsidies. He has 16 hours to allocate between paid work and "leisure". With these opportunities, Adam chooses point X. > a. How much non-earned money income does Adam have, if any? > b. Draw appropriate connections to both axes and indicate values there. > C. How many hours per day does Adam work? > d. How much does he earn in $? > e. What is the opportunity cost of the total leisure that Adam consumes? Be specific. > Now due to changes resulting from COVID19, Adam has to take a wage cut. His non-earned income is unchanged. After the wage cut, he chooses to consume at point X. > f. What is Adam's new wage rate, and how much money does he earn at the new point? > . What is the opportunity cost of his total leisure per day at the new point? > h. When his wage fell, did Adam's income or substitution effect dominate? Explain fully how you know. You can use indifference curves to support your argument but are not required to do so. > consumption (units/day) 240 220 200 180 160 140 x 120 100 80 60 40 20 2 6 8 10 12 14 leisure hoursiday)

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