Ouestion? Assume that a school teacher, Sarah, is currently earning an hourly wage rate of w 1
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. Her original budget line, namely A, represents an optimal bundle for her, A'. Now, suppose there has been an increase in her hourly wage rate to w 2
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, due to which her budget line expands and shifts to B. On the one hand, she thinks she should work more because her free time has become much more expensive than before. On the other hand, she thinks she can maintain the same level of consumption as before by working less and giving more time to her family. Budget line C is parallel to her original budget line A. Having level of consumption based on hourly wages on the y-axis and free time in a day on the x-axis, the graph below represents the all three of these budget lines. Show the following on the graph: a) Where, on budget line B, will Sarah's new optimal bundle be? Call it B'. Draw a corresponding indifference curve on the same budget line to show the optimal bundle. b) Where, on budget line C, will her optimal bundle be? Call it C ′
. c) What will the portion of the change in her free time be due to the income effect? d) What will be the portion of the change in her free time be due to the substitution effect? e) Which effect in stronger? In other ways, how does Sarah behave in response to a change in her hourly wage?