Florence is a highly paid fashion consultant who earns $100 per hour. She has 16 hours per day that she can allocate to work or leisure, and she decides to work for 12 hours.
a. Draw Florence's time allocation budget line for a typical day, and illustrate the indifference curve at her optimal choice.
One of Florence's clients is featured on the front page of Vague, an influential fashion magazine. As a result, Florence's consulting fee now rises to $500 per hour.
Florence decides to work only 10 hours per day.
b. Draw Florence's new time allocation budget line, and illustrate the indifference curve at her optimal choice.
c. In your diagram, show the income effect and the substitution effect from this increase in the wage rate. Which effect is stronger?