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Question posted by Student

Show on a graph the impact of the reduction in the non-labor income on the hours of work.

Answer by our PHD Expert

There is a drop in the non-labor income; as a consequence, the budget line will shift inward from B1 to B2, and the indifference curve will go too from IC1 to IC2. This reduction in non-labor income will reduce the leisure hours as well as the time working; if the income effect is in dominance. However, if we consider the substitution effect is in dominance, then this reduction in the non-labor income would lead to a rise in the hours working and falling of leisure demands, and this is shown by movement from point H to H' and work from y to y'.

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