Labor Economics
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A child of a wealthy family is deciding whether to work or not work and mooch off her parents. Imagine that she is offered a job that pays her $50/hour.
a) Assume she receives a weekly stipend from her parents worth $1000. Use an indifference map and budget line to depict a situation where she does not work. Show the reservation wage on the graph.
b) If her parents took the stipend away, would her decision change? Show on the graph.
c) On a new graph (using the same assumptions in (b)), What would happen to her hours of work if the job instead paid $100/hour? Clearly label the income and substitution effects.
d) On a new graph, (using the same assumptions in (b)), What would happen if the prices of everything in the economy were half of what they were in your original setup? Clearly label the income and substitution effects.
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