Graphically illustrate the budget line for each type of worker.

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Chapter 2, Problem 15P

(a)

To determine

Graphically illustrate the budget line for each type of worker.

(b)

To determine

Determine the type of worker who is ready to work up to the point of the kink and who is kept far away from that point.

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The absolute value of the slope of the consumption-leisure budget line is the after-tax wage, w. Other workers earn w for up to 40 hours of work each week, and then w thereafter as at a second job which pays the same hourly wage as than their primary job. Assume a worker has 168 hours per week and chooses to work 40 hours at the primary job and does not work at a second job. Graph the worker’s budget line and leisure and income at the utility-maximizing level. Assume the primary employer offers the worker an opportunity to earn time-and-a-half working overtime. The overtime pay kicks in after the employee works 40 hours. Graph the old and new budget line and indicate both the number of hours worked and the income earned.

(i) Keith’s marginal utility of leisure is C – 20 and his marginal utility of consumption is L – 50. There are 110 hours in the week available to split between work and leisure. Keith receives £250 of welfare payments each week regardless of how much he works (assume he spends all of his welfare payments on consumption). What is Keith’s reservation wage? (ii) Suppose Danny receives the same welfare payments each week as Keith and has the same number of available hours (110). However, Danny’s indifference curve is flatter than Keith’s. How would his reservation wage compare to Keith’s? Why?

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