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188 CHAPTER 5 THE THEORY OF DEMAND

$600
w = 25
Daily income and units of the composite good U U
$480
w = 20

FIGURE 5.24 Optimal Choice $360 w = 15
of Labor and Leisure 4 5
As the wage rate w rises from U
$5 to $10 to $15, the consumer $240 3 H I
chooses progressively less leisure w = 10
and more work: He moves from U
basket E (16 hours of leisure, 8 of 2 G
work) to basket F (14 hours of U
leisure, 10 of work) to basket G $120 w = 5 1
(13 hours of leisure, 11 of work). B F
But as the wage rate rises from
$15 to $20 to $25, he chooses
progressively more leisure and less E A
work, moving from basket G to 0
basket H to basket I (at basket I, 13 14 15 16 24
he is working only 9 hours, with Hours of leisure
15 hours of leisure).

The consumer’s budget line for this problem will tell us all the combinations
of the composite good and hours of leisure (L) that the consumer can choose. If the
consumer does no work, he will have 24 hours of leisure but no income to spend
on the composite good. This corresponds to point A on the budget line in the
graph.
The location of the rest of the budget line depends on the wage rate w. Suppose
the wage rate is $5 per hour. This means that for every hour of leisure the consumer
gives up to work, he can buy 5 units of the composite good. The budget line thus has
a slope of 5. If the consumer were to work 24 hours per day, his income would be
$120 and he would be able to buy 120 units of the composite good, corresponding to
basket B on the budget line. The consumer’s optimal choice will then be basket E;
thus, when the wage rate is $5, the consumer will work 8 hours.
For any wage rate, the slope of the budget line is w. The figure shows budget
lines for five different wage rates ($5, $10, $15, $20, and $25), along with the optimal
choice for each wage rate. As the wage rate rises from $5 to $15, the number of hours
of leisure falls. However, as the wage rate continues to rise, the consumer begins to
increase his amount of leisure time.
The next section discusses a phenomenon that is directly related to this change in
the consumer’s choice of labor versus leisure as wage rates rise.