Problem Topic 1 Essay Example
Problem Solving 1
Problem Topic 1
Consumption – leisure diagram
The MRS is the slope of the indifference curve
Individual budget constraint is a locus of points that shows various combinations of Leisure-Income that are possible with a given hourly wage.
C= A0 +w.h
C= (A0+wt)-wl .This is represents the individuals budget constraint.
Adding the stock of wealth A0 in the standard income-leisure-budget line model
Adding stock of wealth
(A0+wt)-wl = A0+wh
Modeling of commuting time Q
Hours of leisure
Hours of Work
With commuting time Q, both hours of work and leisure will reduce by a magnitude of Q.
c = A0 + W (T- L)
The optimal number of working hours initially increases. With the introduction of overtime pay, the worker will have the incentive to increase working hours in order to consume at high indifference curve. A continued accumulation of income would eventually make the worker spend the excess income on leisure thus; it is possible to reduce the optimal working hours under this circumstance.
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