Parvati is deciding how many hours she wants to work each week. After account for sleep and other necessities, she has about 100 hours each week available for labor or leisure, so her budget constraint is 100*W = P*C + W*L, where W is her hourly wage, P is the price of each unit of the composite good C, and L is the number of hours she reserves for leisure. Parvati's preferences are expressed by the utility function U = C*L. Initially, P = $96 and W = $23, but recently Parvati's wage increased by $5. Parvati will want to work less due to the income effect, but she will want to work more due the substitution effect. For Parvati, these two forces cancel out exactly. What is the size of the income effect on leisure time?

Answer rating: 100% (QA)

To determine the size of the income effect on leisure time we need to analyze how the increase in Parvatis wage affects her decision regarding the all... View the full answer