Is the graph correct? an explanation along with solutions would be helpful Consi

Question

Is the graph correct? an explanation along with solutions would be helpful

Consider the figure to the right, where Joe initially maximizes utility at consumption-leisure combination R along budget constraint L' Suppose Joe's wage doubles. 1.) Use the line drawing tool to draw Joe's new budget constraint with the higher wage. Label this line 'L' 2.) Use the point drawing tool to identify the new utility-maximizing consumption- leisure bundle for Joe. Label this point T Carefully follow the instructions above, and only draw the required objects. The substitution effect causes Joe to work 200 140 80 hours. 2 The income effect causes Joe to work 20 The combined income and substitution effects cause Joe to work 0 2 4 68 10 12 14 16 18 20 22 24 26 Leisure hours per day

Explanation / Answer

The income effect is the effect of a change in income on the quantity of a good consumed. 2. As the consumer's income increases, the budget line shifts outward from the origin. The set of affordable combinations of goods increases, which enables the consumer to reach a higher indifference curves.

So, the graph is correct.

NOw for the filling the blanks:

1. More hours

2. Less hours

3. Less hours(in the diagram IC and budget lines intersect at that point where the no. of leisure hours are higher than prior.)

The income effect of a rise in the hourly wage rate

The substitution effect of a rise in the hourly wage rate

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