Suppose that a consumer can earn a higher wage rate for working overtime. That is, for the first q hours that the consumer works, she receives a real wage rate of w1, and for hours worked more than q, the consumer receives a real wage of w2; where w2 > w1: Suppose that the consumer pays no taxes and receives no nonwage income. (a) Write the consumerís budget constraint. (b) Draw the consumerís budget constraint and show graphically her optimal choice of consumption and leisure. (c) Show that the consumer would never work exactly q hours. (d) Determine what happens if the overtime wage rate w2 increases to w22, where w22 > w2: Determine the effects on working hours. Explain your results in terms of income and substitution e§ects
Suppose that a consumer can earn a higher wage rate for working overtime. That is, for the first q hours that the consumer works, she receives a real wage rate of w1, and for hours worked more than q, the consumer receives a real wage of w2; where w2 > w1: Suppose that the consumer pays no taxes and receives no nonwage income.
(a) Write the consumerís budget constraint.
(b) Draw the consumerís budget constraint and show graphically her optimal choice of consumption and leisure.
(c) Show that the consumer would never work exactly q hours.
(d) Determine what happens if the overtime wage rate w2 increases to w22, where w22 > w2: Determine the effects on working hours. Explain your results in terms of income and substitution e§ects.
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