Non-Labor Income Expands the Feasible Set
The receipt of non-labor income, such as a gift, results in an expanded feasible set. This occurs because the budget constraint shifts vertically upwards by the amount of the gift, increasing the total income available for consumption at every possible level of free time without altering its slope (the MRT).
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.3 Doing the best you can: Scarcity, wellbeing, and working hours - The Economy 2.0 Microeconomics @ CORE Econ
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Non-Labor Income Expands the Feasible Set
An individual's budget constraint illustrates the maximum amount of goods they can consume for each level of free time they choose. Suppose a person's income comes solely from an hourly wage. If this person then receives a one-time, unconditional cash gift, how will their budget constraint be affected?
Budget Constraint Shift from a Cash Gift
Modeling a Cash Gift on the Budget Constraint
A student who works an hourly job receives a one-time, unconditional cash gift. This event increases the student's total potential income and also increases the amount of consumption they must give up for each additional hour of free time they take.
A student who works an hourly job receives a one-time, unconditional cash gift. This event increases the student's total potential income and also increases the amount of consumption they must give up for each additional hour of free time they take.
An individual's budget constraint illustrates the trade-offs between consumption and free time, based on an hourly wage. The initial constraint is a downward-sloping line. If this individual receives a fixed, unconditional cash gift, how does their budget constraint change?
An individual has 24 hours available each day and earns an hourly wage of $15. If this person receives a one-time, unconditional cash gift of $50, their new maximum possible daily consumption (achieved by having zero hours of free time) is $____.
An individual's budget constraint shows the trade-off between consumption and free time, given their hourly wage. Match each of the following economic events to its corresponding effect on the budget constraint.
An individual's budget constraint is represented by a downward-sloping line on a graph with 'Daily Consumption ($)' on the y-axis and 'Hours of Free Time' on the x-axis. The slope of this line represents the hourly wage. If this individual receives a one-time, unconditional cash gift, which of the following graphical changes correctly illustrates the effect on their budget constraint?
Comparing Income and Wage Effects on the Budget Constraint
Learn After
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.
Impact of a Scholarship on a Student's Budget
Effect of Non-Labor Income on Consumption Possibilities
Effect of Non-Labor Income on Consumption Possibilities
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.