Question

Apply the income–leisure choice framework to illustrate the opportunities, incentives, and choices of workers and managers.

Short answer

A graphical illustration

Step-by-step solution

Introduction

Most workers and managers view both leisure and income as goods and substitute between them at a diminishing rate along an indifference curve.

Thus, a typical worker’s indifference curvehas the usual shape.

Opportunities, incentives, and choices of workers and managers. 

Here, the quantity of leisure consumed by an employee is measured on the horizontal axis and worker income is represented on the vertical axis.

If the worker enjoys leisure for 24 hours without doing any work, he will receive $0; thus, the opportunity cost of 24 leisure hours is $240. Whereas, if the worker chooses 24 hours to work without any leisure, he will gain $240 but will have no leisure. Thus, the opportunity cost of working is 24 hours of leisure.

Workers always try to increase their leisure hours; hence, at equilibrium, the worker chooses to work for 8 hours and leisure for 16 hours, where he receives only $80. The opportunity cost of 16 hours of leisure is $160.

On the other hand, if the manager increases the workers' wages per their productivity. The workers would now gain incentives to work hard and spend less time on leisure. This way, the worker will shift to a higher indifference curve where he receives more wage working more hours than leisure.