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Indifference curve on the new budget

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Amy chooses to consume both leisure and consumption. Let's assume her wage rate is $ 18 per hour, her non-labor income is $ 0, and she has 16 hours in the day to work or consume leisure.

(a) Solve her budget constraint. Graph it.

(b) To the graph above, add a few indifference curves (Make sure to follow the rules we talked about in class). Where would her optimal bundle be? Hint: You do not have to solve for the bundle. Just show it on the graph.

(c) Now, the government has introduced a new subsidy that Amy can apply for. With this subsidy, her new income is w(1+s) where s = 25%. What is her budget constraint with this new subsidy?

(d) On the same graph, graph the old budget line (from part a) and the new budget line (part c). Add one indifference curve on the original budget, and one indifference curve on the new budget. What happens to her consumption of leisure? Explain your reasoning.

(e) Now, let's assume the subsidy is maxed out at $ 90. How will this change her budget constraint? Graph it

Reference no: EM133014777

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