Question

Individual X and Y work 10 and 6 hours a day, respectively. Their hourly wage is $8 per hour. If their wage goes up to $10 per hour, individual X and Y adjust their hours of work as 12 and 5 hours a day, respectively. (Assume that both individuals faces the same 16 hours constraint in a day) (a) (5 points) What can you tell about their indifference curves? (e.g flat or steep) Explain briefly what your answer implies about their preferences for money income and leisure. (b) (5 points) Explain which effect dominates (income or substitution) for individual X and Y. Explain briefly with a sentence

Answer 1

Y has upward sloping supply curve while X has backward bending supply curve.

This means, that with an increase in income Y wishes to work more while X chooses to spend time in leisure work.

For Y income effects dominates subsitution effect, for X, substitution effect dominates income effect.