Answer to Question #300101 in Microeconomics for Lolah

Question

Consider an individual with M5000 of annual nonlabour income. She has total available

time (T) of 80 hours per week, for 52 × 80 = 54160 hours per year. Her current wage

rate is M15.00 per hour, and she currently chooses to work 2000 hours in a year.

(a) Draw a labour-leisure diagram, carefully illustrating her current labour supply

decision. [10]

(b) The wage rate rises to M18.00 per hour, and she decides to work 2040 hours.

At M18.00 per hour, if she worked 2200 hours per year, she would have been

indifferent to her original work decision (in part (a)). Show her new choice on

a diagram, and calculate the income and substitution effects associated with the

wage change. Calculate the compensated and uncompensated elasticities of labour

supply implied by her response to the wage increase.

Answer 1

substitution effect=30000-5000=25000

income effect=36720-30000=6720

At M18.00 per hour, if she worked 2200 hours per year, she would have been

indifferent to her original work decision