1. Jane consumes leisure (l) and composite good (c). She has non-labor income of $100 and her employer pays her $10 per hour. Price of the composite good is $1 per unit.
a. Draw Jane's budget constraint. Provide values for the l- and c-intercepts.
b. Jane's utility-maximizing bundle contains 16 hours of leisure. Draw indifference curve through the utility maximizing bundle in your graph for Part (a).
Assume that price of composite good increases to $2 per unit.
I. Add Jane's new budget constraint to graph for Part (a).
II. Recognize bundle which represents the substitution effect.
III. If leisure good is inferior, will income effect tend to increase or decrease amount of leisure that Jane consumes?
IV. Overall, does Jane's consumption of leisure increase or decrease, or is effect unclear? Describe the answer in terms of the signs of income and substitution effects.