Question:

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Expert answer:

Step: 1

The trade- off between work and leisure is represented by an

indifference curve shown in the following diagram.

Step: 2

If a person spends more and more amount of time in work to

increase his consumption, he will get less and less time for
leisure. Therefore, the indifference curve is a downward
sloping curve convex to the origin. Furthermore, if wages
increases, it has both income effect and substitution effect.

Step: 3

The substitution effect of the wage increase will make a

person to choose less leisure and more working hours as
leisure becomes more costly – that is a person has to forgo
a high wage earnings for an extra hour of leisure.

Step: 4

On the other hand, the income effect of a wage rise will make
the consumer better off and thus will induce him to have
more of leisure and more amount of consumption.

If the substitution effect outweighs the income effect, the

consumer will work more.

Similarly, if the income effect outweighs the substitution

effect, the consumer will work less. In such cases only, the
consumption would decrease and this is possible only when
the good is inferior.