Figure B5 show the substitution effect on leisure and on income.

The income effect is that the higher wage, by shifting the labor-leisure budget constraint to the right, makes it

possible for Petunia to reach a higher level of utility. The income effect is the movement from point C to point

B; that is, it shows how Petunia’s behavior would change in response to a higher level of utility or “buying

power,” with the wage rate remaining the same (as shown by the dashed line being parallel to the new budget

constraint). The income effect, encouraging Petunia to consume both more leisure and more income, is drawn

with arrows on the horizontal and vertical axis of Figure B5.

Putting these effects together, Petunia responds to the higher wage by moving from choice A to choice B. This

movement involves choosing more income, both because the substitution effect of higher wages has made

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B • Indifference Curves 527
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