Question One :Bob has 60 hours per week available that he can spend either working or engaging in leisure. He can work at a wage rate of $24 per hour. Bob receives $400 of rental income per week, no matter how much he works.

Use your understanding about the leisure-income model to answer the following questions:

a)In a carefully labelled diagram, draw Bob's budget line and his optimal choice of working 40 hours per week. Calculate his maximum and optimal amount of income.

b) Suppose Bob is to share the household expenses and be "taxed" 50% of his wage income. Draw another diagram to compare Bob's choice in Part a) and the new labour supply decision of working 50 hours per week due to the "tax". Clearly label out the income effect, substitution effect and total effect in the diagram.