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Answered Same Day Dec 23, 2021

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Robert answered on Dec 23 2021

122 Votes

Answer to 1:
Maximize u(c, l) subject to
pc + wl = wT+Y
c = consumption, l = leisure time, T = total time endowment and Y = non-wage income
To prove that if leisure is an inferior good, then labor supply is upward-sloping, we use graphical
technique.
In the figure below, BC1 shows the initial budget constraint associated with wage level ‘w’, leisure is
epresented on horizontal axis and consumption (c) is represented on vertical axis. Now suppose
wage rises to w*. With increase in wage rate, the slope of budget constraint (w/p) would rise and
therefore the budget constraint would become steeper (BC2). There will be two effects associated
with increase in wage level; substitution effect and income effect.
Substitution effect; since wage level has risen, so leisure has become relatively expensive and
therefore people will consume less leisure and supply more of labor i.e. people will substitute...

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