In: Economics
Question 4: People decide how to “budget” their time in
much the same way that they...
Question 4: People decide how to “budget” their time in
much the same way that they decide how to budget for different
goods. Each person decides how much they “value” their leisure time
versus their work time. The more people work, the more they tend to
value their remaining leisure time. This is the justification for
paying overtime to people working over 40 hours per
week.
- How might we model this trade-off economically using
the basic labor supply model by showing the budget line and utility
curves or indifference curves? In your graph of the basic labor
supply, be sure to identify the optimum point of the budget line
and the indifference curve.
- Suppose that the government imposes a tax on labor. If
a tax is imposed on labor, the worker will perceive this tax as a
reduction in his or her wage. For every hour worked, the individual
worker receives a lower return on his or her labor. Demonstrate the
effects of this tax on labor supply using the graph in part a
showing a graph of the income effect and the substitution effect.
That is, there are two graphs. Summarize the impacts of this tax on
labor.