Reference no: EM132843020

A. Draw a labor-leisure diagram for hours worked during one week. Create, draw and label budget line A, where a worker is offered a wage of $20 per hour for whichever number of hours that he chooses to work.

B. Create, draw and label budget line B. Pay rate is $20 per hour for the first 40 hours of work per week, but a higher overtime rate of $30 per hour also is offered to the worker, but $30 only is for labor hours in excess of the first 40 hours per week at $20 per hour.

C. Use two separate Cobb-Douglas indifference curves to show a worker who chooses to work more than 40 hours per week on budget line B, but only will work 40 hours on budget line A.

D. Is this worker's choice for more work hours on budget line B (over only 40 hours on budget line A) due to the income effect, the substitution effect, or both?

Explain fully AND DRAW DIAGRAM applying the definitions of both the substitution effect and the income effect in your answer. You also may use an auxiliary budget line to defend your answer.