Using the model developed in The Economy Unit 3, Section 3.7, consider Alfie who is head barista at a popular caf in Sydney. Prior to the coronavirus pandemic he had been receiving a wage of $35 per hour.

Assume that Alfie's spending on goods and services cannot exceed his earnings per day. Maximum consumption (c) per day is:

c = w(24 - t)where t = hours of free time per day.

a. Initially when facing w = $35 per hour Alfie chooses to work 8 hours per day and have 16 hours of free time per day. Using a fully labelled diagram describe Alfie's utility maximizing combination of free time and consumption.

b. Due to the financial impact of the coronavirus on the caf, the owners of the caf have reduced Alfie's wage to $25 per hour. Using the same diagram as used in part "a" show Alfie's new utility maximizing combination of free time and spending on goods and services assuming that his hours of free time each day decrease to 12 hours.

c. On your diagram decompose the overall change in hours of free time in response to the wage decrease into the (i) income effect and (ii) substitution effect. You must use words as well as the diagram to explain the decomposition of the overall change.