Joanna currently gets $1000 weekly in investment income, and she works 10 hours each week at $50 an hour. Leisure is neither inferior nor a normal good for Joanna. Assume she is free to choose her hours of work. If offered a choice between a 10% increase in her investment income and a 20% increase in her hourly wage, then Joanna will choose the increase in wage.

Question

Quizplus · Accepted Answer

Since leisure is neither an inferior nor a normal good, an increase in investment income does not affect her demand for leisure. However, an increase in hourly wage increases the opportunity cost of leisure (since each hour of leisure now "costs" more in terms of forgone wage earnings). Therefore, Joanna would prefer a higher hourly wage over a higher investment income.

Joanna Currently Gets $1000 Weekly in Investment Income, and She