6. (15 points) Leonardo has 24 hours per day that he can allocate to work...
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Accounting
6. (15 points) Leonardo has 24 hours per day that he can allocate to work or leisure. His job pays a wage rate of $20. Leonardo decides to consume 17 hours of leisure.
a. Label the axes.
b. Draw Leonardo's time allocation budget line for a typical day.
c. Put an X on the budget line at his decision point and draw an indifference curve showing this as optimal point.
d. What is Leonardos daily income?
Now Leonardo's wage rate rises to $25.
e. Draw Leonardo's new budget line.
f. Put an X on the new budget line at the point that you think Leonardo will now choose. Any point on the new budget line is fine.
g. How many hours did Leonardo work each day when the wage was $20?
h. How many hours does Leonardo work when the wage is $25 (interpret your chart to answer this question.)
i. Leonardo's decision of how much to work after the wage increases is the result of a substitution effect and an income effect. Which effect is stronger for Leonardo based on the chart you drew and your answers to parts g. and h.?
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