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Evaluating Changes to the Budget Constraint
A government is considering two policies to increase the income of a worker who has 24 hours a day to allocate between work and free time.
- Policy A: Increase the worker's hourly wage.
- Policy B: Provide the worker with a fixed daily cash grant, regardless of how many hours they work.
Critique the following statement: 'Both policies will have the same effect on the worker's budget constraint because both increase the worker's potential income.' In your answer, analyze how each policy separately alters the shape and position of the budget constraint, which has consumption on the vertical axis and free time on the horizontal axis.
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CORE Econ
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Empirical Science
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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Figure 3.9 - The Effect of a Wage Increase on the Feasible Set
Figure 3.13a - Optimal Choices Before and After a Wage Rise
An individual's budget constraint, representing the trade-off between daily consumption and hours of free time, changes. The original constraint and the new constraint both originate from the same point on the horizontal axis (representing maximum free time and zero consumption), but the new constraint is steeper than the original. What economic event best explains this change?
Analyzing a Change in the Budget Constraint
An increase in an individual's hourly wage rate causes their budget constraint, which shows the trade-off between consumption and free time, to shift outward in a parallel manner.
Calculating the Impact of a Wage Increase
Explaining the Effect of a Wage Increase on the Budget Constraint
An individual's hourly wage increases. Match each element of the budget constraint model, which illustrates the trade-off between consumption and free time, to its correct description following this change.
When an individual's hourly wage increases, the budget constraint, which illustrates the trade-off between consumption and free time, becomes steeper. This is because the slope of the budget constraint represents the ________ of an hour of free time, which has now increased.
An individual who can work up to 24 hours a day receives an increase in their hourly wage. Arrange the following statements in the correct logical sequence to explain how this wage increase affects their budget constraint, which represents the trade-off between daily consumption and free time.
Evaluating Changes to the Budget Constraint
Impact of a Pay Raise on Opportunity Cost
Figure 3.13b - Graphical Setup for Decomposition Analysis