Marginal rate of substitution diminishes

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Reference no: EM131808114

Using the income/leisure model, graph and explain the following siutations: (be sure to properly label your graph)

i) With the use of a graph, explain why the marginal rate of substitution diminishes as one moves down an indifference curve

ii) Suppose income increases and one moves to a higher indifference curve. Show the new optimization point where leisure is a normal good. In your answer, explain why leisure is a normal good. Is this a pure effect? Explain.

iii) Suppose the wage rate of the employee increases and the employee desires more leisure. On your graph, show the new optimal allocation between income and leisure.

iv) On your graph, c;ear;y illustrate the income and substitution effect of this wage increase. Explain what the means.

Reference no: EM131808114

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