Figure 5.14: Angela’s Optimal Choice under a Tenancy Contract
Figure 5.14 illustrates Angela's decision-making process under a tenancy contract with a fixed rent of 23 bushels. Her consumption possibilities are shown by a new frontier (the dotted line), which is her production capacity reduced by the rent. As she is free to choose her work hours, Angela selects the optimal point L, where she works for eight hours and consumes 23 bushels. This allocation corresponds to the tangency point between her consumption frontier and her highest attainable indifference curve (IC2), providing her with exactly her reservation level of utility and making her willing to accept the contract.
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Ch.5 The rules of the game: Who gets what and why - The Economy 2.0 Microeconomics @ CORE Econ
The Economy 2.0 Microeconomics @ CORE Econ
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Figure 5.14: Angela’s Optimal Choice under a Tenancy Contract