Ken has an annual non-labour income of $5000. Suppose he has the total available time of 52×80=4160 hours per year. Ken's wage rate is $15 per hour, and he chooses to work 2000 hours in a year. Suppose Ken’s wage rate rises from $15 to $18 dollars per hour, and he decides to work 2040 hours. At $18 per hour, if he worked 2200 hours per year, he would be indifferent to his original work decision before the wage increase Then: - Draw a diagram to show Ken’s choices before and after the wage increase. Calculate his maximum and optimal income before and after the wage change. And calculate the substitution effect, income effect and total effect generated by the wage change. Show these three effects in your diagram.
Ken has an annual non-labour income of $5000. Suppose he has the total available time of 52×80=4160 hours per year. Ken's wage rate is $15 per hour, and he chooses to work 2000 hours in a year. Suppose Ken’s wage rate rises from $15 to $18 dollars per hour, and he decides to work 2040 hours. At $18 per hour, if he worked 2200 hours per year, he would be indifferent to his original work decision before the wage increase
Then: -
Draw a diagram to show Ken’s choices before and after the wage increase. Calculate his maximum and optimal income before and after the wage change. And calculate the substitution effect, income effect and total effect generated by the wage change. Show these three effects in your diagram.
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