Problem Topic 1 Essay Example

Problem Topic 1

1. Consumption – leisure diagram

Consumption

Indifference curve

The MRS is the slope of the indifference curve

1. 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

But h=T—l

C= A₀+w(T-l)

C= (A₀+wt)-wl .This is represents the individuals budget constraint.

1. Adding the stock of wealth A₀ in the standard income-leisure-budget line model

wT-wl =wh

Adding stock of wealth

C= (A₀+wt)-wl

(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.

Consumption

c = A₀ + W (T- L)

.

Leisure hours

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.