The figure given below shows the income-leisure trade off of an individual.Figure 16.5
AB and AC: Income constraints of the individual
I 1 , I 2 , and I 3 curves show the income leisure choices of the individual.
-In Figure 16.5, if the income constraint of the individual is given by the line AC, he maximizes his utility by choosing _____ hours of leisure and _____ units of income.

Question

The figure given below shows the income-leisure trade off of an individual.Figure 16.5
  AB and AC: Income constraints of the individual
I 1 , I 2 , and I 3 curves show the income leisure choices of the individual.
-In Figure 16.5, if the income constraint of the individual is given by the line AC, he maximizes his utility by choosing _____ hours of leisure and _____ units of income.

Quizplus · Accepted Answer

To maximize utility, the individual should choose a point where the budget constraint AC is tangent to the highest possible indifference curve. This occurs at point P where the IC curve I₂ is tangent to the budget constraint AC. At point P, the individual chooses L₂ hours of leisure and Y₃ units of income. Therefore, choice D is the correct answer.

The Figure Given Below Shows the Income-Leisure Trade Off of an Individual.Figure