Labor-Leisure choice.   Uses 80 hour maximum work week.    Utility = R3C2      R = leisure C = dollar amount of income for consumption Budget Line 1: Wage = $16 per hour. No other income. Draw the Labor-Leisure diagram, including the budget line.   Solve the point of optimization, and label it point A.   Draw the indifference curve.   Label it U1 Budget Line 2: Wage = $22 per hour. No other income. Draw the budget line for this new $22 wage. Solve the point of optimization, and label it point B.   Draw the indifference curve.   Label it U3 Use an auxiliary budget line to separate the income effect from the substitution effect. Identify the substitution effect as point S.   Draw the indifference curve. Label it U2      The point of optimization for part C can be labeled, rather than numerically solved, as long as the drawn answers show expected results for two normal goods.

Labor-Leisure choice.   Uses 80 hour maximum work week.    Utility = R3C2      R = leisure C = dollar amount of income for consumption Budget Line 1: Wage = $16 per hour. No other income. Draw the Labor-Leisure diagram, including the budget line.   Solve the point of optimization, and label it point A.   Draw the indifference curve.   Label it U1 Budget Line 2: Wage = $22 per hour. No other income. Draw the budget line for this new $22 wage. Solve the point of optimization, and label it point B.   Draw the indifference curve.   Label it U3 Use an auxiliary budget line to separate the income effect from the substitution effect. Identify the substitution effect as point S.   Draw the indifference curve. Label it U2      The point of optimization for part C can be labeled, rather than numerically solved, as long as the drawn answers show expected results for two normal goods.