Suppose that a consumer can earn a higher wage rate for working overtime. That is, for the first q hours the consumer works, he/she receives a real wage rate of w1, and for hours worked more than q he/she receives w2, where w2> w1. Suppose that the consumer pays no taxes and receives no non - wage income, and he/she is free to choose hours of work. a. Draw the consumer's budget constraint, and show his/her optimal choice of consumption and leisure. Hint: think of the slope of the budget constraint for levels of leisure less than h* - q (due to higher overtime wage) and for levels of leisure higher than h*- q. b. Determine what happens if the overtime wage rate w2 increases. Explain your results in terms of income and substitution efects. Hint: you must consider the case of a worker who initially works overtime, and a worker who initially does not work overtime.

Suppose that a consumer can earn a higher wage rate for working overtime. That is, for the first q hours the consumer works, he/she receives a real wage rate of w1, and for hours worked more than q he/she receives w2, where w2> w1. Suppose that the consumer pays no taxes and receives no non - wage income, and he/she is free to choose hours of work. a. Draw the consumer's budget constraint, and show his/her optimal choice of consumption and leisure. Hint: think of the slope of the budget constraint for levels of leisure less than h* - q (due to higher overtime wage) and for levels of leisure higher than h*- q. b. Determine what happens if the overtime wage rate w2 increases. Explain your results in terms of income and substitution efects. Hint: you must consider the case of a worker who initially works overtime, and a worker who initially does not work overtime.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter16: Labor Markets

Section: Chapter Questions

Problem 16.1P

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