Tobin works at a ball-bearing assembly factory; he likes spending his paycheck, but he also likes lounging on his patio. His indifference curves are shown below:

a. Tobin is currently making $20 per hour. Add Tobin?s budget constraint to the graph. How many hours will Tobin spend working? Lounging on his patio?

b. Things are looking rough in the ball-bearing industry. Tobin?s boss, Mr. McGuire, explains why: ?One word: plastics.? Then, McGuire slashes his pay in half. Add Tobin?s new budget constraint to the graph. Does Tobin work more or less after the pay cut?

c. Break the total effect of the wage cut into substitution and income effects.

d. Is leisure a normal or inferior good for Tobin? Explain why you can determine the answer to this question without answering part (c).

Transcribed Image Text:

Consumption ($) $480 360 240 U1 U2 120 Leisure 24 (hours) 18 12