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An individual who works for an hourly wage receives a large, unconditional cash payment. This payment increases the opportunity cost of their free time.
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Ch.3 Doing the best you can: Scarcity, wellbeing, and working hours - The Economy 2.0 Microeconomics @ CORE Econ
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How Preferences Determine the Effect of Non-Labor Income
An individual's budget constraint illustrates the trade-off between their daily free time and their maximum possible consumption, with the slope determined by their hourly wage. Consider two separate scenarios:
- The individual receives a permanent increase in their hourly wage.
- The individual starts receiving a fixed daily cash gift from a relative, which is the same amount every day regardless of how much they work.
How do the effects of these two scenarios on the budget constraint differ?
An individual who works for an hourly wage receives a large, unconditional cash payment. This payment increases the opportunity cost of their free time.
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An individual's budget constraint illustrates the possible combinations of consumption and free time, with its slope representing the trade-off between them. Match each economic event to its corresponding effect on the individual's budget constraint.
An individual's budget constraint illustrates all possible combinations of consumption and free time they can afford. If this individual begins to receive a fixed daily cash payment that does not depend on how many hours they work, what is the effect on their feasible set of choices?
An individual's budget constraint is a line that illustrates the trade-off between their daily free time and their maximum possible consumption, with the slope determined by their hourly wage. Imagine this individual receives a significant, unconditional cash prize from a lottery. How does this event alter their budget constraint?
Analyzing a Shift in the Feasible Set
When an individual receives a fixed, unconditional cash payment, their budget constraint shifts upwards without changing its slope. This indicates that while their total possible consumption has increased, the ________ of an hour of free time has remained constant.