Problem Set #1 Labor Economics

1. Theory of Labor Supply

A) You (like everyone else) have 24 hours available to you per day. You spend 8 of those hours asleep. Suppose you have a job that pays $10 per hours and generally choose to prioritize work over leisure, please draw a budget constraint as well as three indifferent curves illustrating those conditions. At least one of the indifference curves should intersect the budget constraint at two points, please explain why that does not maximize your utility and what conditions need to hold in order to maximize your utility.

b) What would happen if your wage doubled to $20 per hour? How would that change the utility maximizing combination of your budget constraint and indifference curve? Please show graphically and describe how this change can be disaggregated into a substitution and an income effect.