Reference no: EM133396120

Case: Consider workers who are able to choose their weekly work hours, in the standard setup of the neoclassical model of "daily" labor supply. The horizontal axis shows up to 16 daily hours that the worker can allocate to leisure or work. Time spent commuting to work is time that is not enjoyable. With the right podcast or talk radio, it might be less awful, but let us model commuting time as a net loss of leisure time that is not formally compensated through work. Consider workers who live around a metro area called the San Bénézet Bay Area, who must spend 2 hours each day commuting around a large bay if they choose to work any amount of time, and there are no alternatives to commuting if any work is chosen. This hour of commuting is not paid, and the worker cannot telecommute. (Perhaps they work at Elon Musk's Twitter.) But if the worker chooses not to work, they do not commute and do not spend time commuting. All workers receive the same moderately small amount of daily nonlabor income Y, perhaps $75, which creates a "kink" in the budget constraint in the usual way. Now imagine that policymakers propose building a new bridge over San Bénézet Bay, whichwill cut the daily commute time roughly in half. The proposal envisions funding the bridge with a large philanthropic donation, so it would come with no user fees (i.e., tolls) nor tax increases.

(b) Draw a budget constraint that shows leisure time (x) versus money income

(y), showing the time cost of commuting, which is only relevant for workers who work strictly positive hours, and a wage rate w. Assume potential workers have 16 hours of daily time to split between leisure and work. Depict the budget constraint without the bridge, when the time cost of commuting is relatively large.