Question

a) With free time on the horizontal axis and consumption on the vertical axis, draw the feasible set of an individual who receives a lump sum grant of £100 per day and then can work for a wage of £10 per hour. After earning £50 in his job he is subject to an income tax rate of 10%.

b) Suppose now that his wage increased to £15 per hour. Draw the new feasible set on your diagram.

c) Draw the optimal indifference curve on your diagram for an individual who chose to work 7 hours when wages were £10 an hour.

d) Describe the new choice of the individual after the wage rises to £15 in terms of the income and substitution effects. Would the consumer work more or less?

Answer 1

ga) let totas time T, then fet time -R, labor houwos -L thus T-Lt R , 土0' Non labor income: 100 C- ) 나 100. CIOT-10R +100 ICO to tal o time avalable T-5. 01 esuse Labor dus kink at T-5, feasible set B DA ouls, leisus.1 upo