Problem
Using the income/leisure model, graph and explain the following siutations: (be sure to properly label your graph)
i) With the use of a graph, explain why the marginal rate of substitution diminishes as one moves down an indifference curve
ii) Suppose income increases and one moves to a higher indifference curve. Show the new optimization point where leisure is a normal good. In your answer, explain why leisure is a normal good. Is this a pure effect? Explain.
iii) Suppose the wage rate of the employee increases and the employee desires more leisure. On your graph, show the new optimal allocation between income and leisure.
iv) On your graph, ceary illustrate the income and substitution effect of this wage increase. Explain what the means.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.