3. (19 points) Using the graph below, carefully draw the following scenario: (a) (7 points) the...

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3. (19 points) Using the graph below, carefully draw the following scenario: (a) (7 points) the individual's non-labor income falls by a third and the market wage rate increases by two-fold. Prior to the change, assume V was $600 and wmarket was $12.5. You can assume total T is 110. (You will need to draw the original curves first, then show how they change). C ($) L (hrs/wk) (b) (5 points) on the same graph, pick an initial point of consumption at h = 40, and label it as point P. Then, pick a point on the final (after the change) line, which would indicate that the substitution effect dominated the income effect. You can assume that leisure is a "normal good". (c) (4 points) Decompose the various effects and its direction (using the following information from part (b): substitution effect dominated the income effect.). I.e., the non-labor income cut led to a (positive/negative substitution/income) effect. Hint: there are more than two! (d) (3 points) Overall, what could you say about the utility of this individual after the change? Is she better off? Is she worse off? Explain. 3. (19 points) Using the graph below, carefully draw the following scenario: (a) (7 points) the individual's non-labor income falls by a third and the market wage rate increases by two-fold. Prior to the change, assume V was $600 and wmarket was $12.5. You can assume total T is 110. (You will need to draw the original curves first, then show how they change). C ($) L (hrs/wk) (b) (5 points) on the same graph, pick an initial point of consumption at h = 40, and label it as point P. Then, pick a point on the final (after the change) line, which would indicate that the substitution effect dominated the income effect. You can assume that leisure is a "normal good". (c) (4 points) Decompose the various effects and its direction (using the following information from part (b): substitution effect dominated the income effect.). I.e., the non-labor income cut led to a (positive/negative substitution/income) effect. Hint: there are more than two! (d) (3 points) Overall, what could you say about the utility of this individual after the change? Is she better off? Is she worse off? Explain.

Answer rating: 100% (QA)

a To draw the scenario we first need to plot the original budget constraint and indifference curve and then show how they change after the given scena... View the full answer