Reference no: EM132401027

Suppose an individual has 16 hours per day that can be spent either working or at "leisure". Assume initially that the individual earns all income from working at the after-tax wage rate of $10/hour.

(a) Using an indifference curve, illustrate the individual's decision to work 10  hours per day. Calculate and, in your diagram identify, the individual's quantity of leisure, supply of labour, and consumption of "other goods". What is the price of leisure?

(b) Now suppose that the individual receives $100/day in non-labour income. Illustrate the new budget line in your diagram. Assuming that the new equilibrium involves working 8 hours per day, how much consumption does the individual have? Is the person better off or worse off? Can you determine whether leisure and consumption are normal or inferior goods for the individual?

(c) Now suppose that the individual is offered "overtime" hours for which the pay will be "time-and-a-half" for every hour worked in excess of 8 hours. That is, the wage for overtime work (for hours greater than 8) is $15/hour. Would the individual choose to work more than 8 hours per day? Illustrate in your diagram and explain.