market and receives $50 per week in non-labor income. Assume the total number of hours available for work (h) and leisure (L) is 168 hours per week (i.e., ? = 168 = ℎ + ?). a. Draw the budget constraint for this individual. Label the endowment point. b. What is the maximum value of consumption that this individual could achieve in a week? c. In the United States, the Fair Labor Standards Act requires workers to be paid 1.5 times their usual hourly wage for “overtime” work, defined as work in excess of 40 hours in a week. If this law applies to the worker described above, how does it change the budget constraint?
Consider a worker who earns $20/hour in the labor market and receives $50 per week in
non-labor income. Assume the total number of hours available for work (h) and leisure
(L) is 168 hours per week (i.e., ? = 168 = ℎ + ?).
a. Draw the budget constraint for this individual. Label the endowment point.
b. What is the maximum value of consumption that this individual could achieve in
a week?
c. In the United States, the Fair Labor Standards Act requires workers to be paid 1.5
times their usual hourly wage for “overtime” work, defined as work in excess of
40 hours in a week. If this law applies to the worker described above, how does it
change the budget constraint?
d. Now suppose Congress passes an income tax. The income tax applies to labor and
non-labor income. The Fair Labor Standard Act is still in effect. The first $1,000
in weekly income is exempt from the tax. However, every dollar above $1,000 is
taxed at a rate of 10%. (To be clear: the tax on $1,000 in income is 0, the tax on
$1,001 is $0.10, the tax on $1,002 is $0.20, and so on.) Show how this new tax
alters the budget constraint.
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