As a student, you allocate your daily 24 hours between working (to make living and meet your
Question:
As a student, you allocate your daily 24 hours between working (to make living and meet your consumption desires) and leisure. Assume the hourly wage rate is currently at $22.
a) Construct your budget constrain equation and illustrate your own choice of utility- maximizing bundle on a diagram (with consumption on the vertical axis and leisure hours on horizontal axis). By 'your own choice', you need to contemplate and specify the number of working hours to make you most happy.
b) Now suppose that because of a shortage of labour (in the post pandemic world), the wage rate increases to $25 per hour. With the help of a diagram, explain how this new wage rate would impact your own optimal choice (i.e., you need to be specific on the number of working hours and explain why you decide to choose this number).
c) In your diagram in part (b), decompose your overall change in leisure hours (due to the wage rise) into income and substitution effects.