Question

On a labor-leisure diagram, illustrate the impact on desired hours of work resulting from an increase in non-wage income. Assume leisure is a normal good.

Answer 1

The labour leisure diagram shows workers preference and trade off between leisure and labour given the hours of work , non labour income etc. Here we are assuming that leisure is a normal good. When a good is normal , it implies that the quantity demanded of the good tends to increase as the income increases. In common terms also , if we have more income or wealth , then it implies that normally we would want to work less. The same thing is depicted in the diagram.

The diagram below shows the indifference curves and budget lines. The indifference curves are downward sloping , convex and do not interesect (which are the basic characteristics of the indifference curves )

When the nonwage income increases ie the income increased due to sources other than work from which we derive , leisure being a normal good. it implies that due to the pure income effect the consumer would now consume all of the goods at a higher quantity and would reduce hours of work or increase hours of leisure.

So individual has a parallel shift in budget line and shifts to point A2 which is on a higher indifference curve ie U2. He is better off at U2 than U1. Also the leisure hours shift from L1 to L2 (increases )

On the level of consumption, consumption has increased from C0 to C0+C1 where C1 is the increase due to non labour increase in income.

So assuming leisure to be a normal good , the increase in non labour income would reduce working hours , increase leisure hours and the consumption of othe goods of the individual.

(You can comment for doubts )