We are looking at a consumer who should choose how many hours she wants to work, and thus how much free time she gets. Let l symbolize working hours and f free time. The hourly wage is w, and there is a tax rate t on income. Let x be the amount of material goods, and p the price level. a) Explain how the consumer determines his work offer (desired number of working hours).

b) What will be the effect on the labor supply of wage increases. Explain in particular what we mean by the substitution and income effect of the wage increase.

c) The consumer receives a financial support of z kroner if the net market income is lower than a certain limit (y). Show on a figure what the budget line now looks like. How can the support be thought to affect the labor supply for (i) a consumer who without the support scheme would have an income below the limit, and (ii) a consumer who without the support would have an income above the limit.