Figure19-13An Increase in the Wage Rate The two panels show Clive’s initial optimal choice, point A on BL1, the time allocation budget line corresponding to a wage rate of $10. After his wage rate rises to $20, his budget line rotates out to the new budget line, BL2: if he spends all his time working, the amount of money he earns rises from $800 to $1600, reflected in the movement from point Y to point Z. This generates two opposing effects: the substitution effect pushes him to consume less leisure and to work more hours; the income effect pushes him to consume more leisure and to work fewer hours. Panel (a) shows the change in time allocation when the substitution effect is stronger: Clive’s new optimal choice is point B, representing a decrease in hours of leisure to 30 hours and an increase in hours of labour to 50 hours. In this case the individual labour supply curve slopes upward. Panel (b) shows the change in time allocation when the income effect is stronger: point C is the new optimal choice, representing an increase in hours of leisure to 50 hours and a decrease in hours of labour to 30 hours. Now the individual labour supply curve slopes downward.