p b, $ per unit L 2 (p b = $6)L 3 (p b = $4) e e 1 I 1 I 2 I 3 Beer (b), Gallons per year D 1, Demand for Beer Price-consumption curve Wine, (W), Gallons per y ear BUDGET CONSTRAINT AND INDIFFERENCE CURVE DEMAND CURVE Beer (b), Gallons per year L 1 (p b = $12) E 1 2 E 2 e 3 E 3 GRAPH_1 GRAPH_2

Win e, Gallons per y ear Income-consumption curve Engel curve for beer Beer, Gallons peryear Beer, Gallons peryear Beer, Gallons peryear I 2 I3I3 I 1 P r ice of bee r, $ per unit Y, Budget e 2 E 1 Y 1 = $419 Y 2 = $628 Y 3 = $837 L3L3 L 2 L 1 e 1 D 1 D 2 D3D3 E 1 * E 2 E 2 * E 3 E 3 * e 3 BUDGET CONSTRAINT AND INDIFFERENCE CURVES DEMAND CURVE ENGEL CURVE GRAPH_3 GRAPH_4 GRAPH_5

Housing, Square f eet per y ear Food,Pounds peryear Food normal, housing normal Food inferior, housing normal Food normal, housing inferior b c e a L 1 L 2 I ICC 2 C 1 C 3 GRAPH_6

Y 2 Y 1 Y 1 Y 2 Y3Y3 Y 3 L 1 Y, Income L 2 L 3 e 2 e 3 e 1 E 2 E3E3 E 1 I 1 I 2 I 3 Hamburger peryear Income-consumption curve Hamburger peryear All other goods per y ear Engel curve BUDGET CONSTRAINT AND INDIFFERENCE CURVES ENGEL CURVE GRAPH_7A GRAPH_7B

e* L1L1 L* L2L2 e1e1 e2e2 I1I1 I2I2 C, Music CDs Units peryear Income effect = -3 Substitution effect = Total effect = -6 D, M o vie D VD s, Units per y ear 15 = Substitution Effect + Income Effect = -3 + (-3) NORMAL GOOD CASE GRAPH_8

GIFFEN GOOD CASE I Bas k etball, Ti ck ets per y ear Movies,Tickets peryear L 1 Total effect L 2 e 1 e 2 I 1 I 2 GRAPH_9A

GIFFEN GOOD CASE II Bas k etball, Ti ck ets per y ear Movies,Tickets peryear L 1 L* Income effect Substitution effect L 2 e 1 e 2 e* I 1 I 2 Total effect GRAPH_9B

Y, Goods per d a y Time constraint H 2 = 12H 1 = 8240 N 2 = 12 N1N1 = H, Work hours per day N, Leisure hours per day H 2 = 12 N 2 0 H, Work hours per day N, Leisure hours per day Demand for leisure I 2 I 1 1 –w 2 L 1 L 2 (a) Indifference Curves and Constraints w, W age per hour –w 1 1 e 2 Y 2 Y 1 w 1 w 2 e 1 E 2 Demand for leisure (b) Demand Curve E1E1 H 1 = 8 N1N1 = 16 Budget constraint and Indifference curves GRAPH_10 GRAPH_11

Income and Substitution Effects of a Wage Change Since income effect is positive, leisure is a normal good. Y, Goods per d a y Time constraint H 2 H*H N 2 N*N 1 0 Substitution effect Income effect Total effect H,Work hours per day N, Leisure hours per day I 2 I 1 L 2 L* L 1 e 2 e 1 e* GRAPH_12

Labor Supply Curve and Inferiority Y, Goods per d a y (a) Labor-Leisure Choice Time constraint H 2 H 3 H H,Work hours per day E 1 E 3 E 2 L 2 I 2 I 3 I 1 L 3 L 1 e 2 e 1 e 3 w, W age per hour (b) Supply Curve of Labor Supply curve of labor H 2 H 3 H 1 240,Work hours per day At low wages, an increase in the wage causes the worker to work more…. H but at high wages, an increase in the wage causes the worker to work less…. GRAPH_13

Relationship of Tax Revenue to Tax Rates