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Labor Economics

Graphing questions (8 points each, 16 total) A) Label the graph to show the effects of an increase in non-labor income. Label all relevant parts of the graph. (You might or might not use every line/curve on the graph.)B) Label the graph to show the effects of an increase in the wage rate. Label all relevant parts of the graph. (You might or might not use every line/curve on the graph.)

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A) In the below graph, have added one more indifference curve i.e.Z3 to show the shift in budget line. As the non-labor income increases there will be a parallel shift to a higher indifference curve Z2. This means that worker will enjoy more hours at leisure. Earlier the leisure hours were OE but with increase in non-labor income it increases to OC.

(X) Consumption Z2 Z3 Z1 (L) Leisure

B) In case of increase in wage rate, the budget line will rotate at point Y and shifting the indifference curve from Z1 to Z2. This increase in wage rate will make the job lucrative for the worker and he is ready to forgo his leisure hours from OD to OC. This means worker would work for more hours , denoted by CD.

(X) Consumption Z2 1 Z1 cぐ (L) Leisure

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