Sarah is paid $5 per hour if she works 8 hours or less and is paid...

Sarah is paid $5 per hour if she works 8 hours or less and is paid $10 per hour (the “overtime” wage) if she works more than 8 hours. Sarah maximizes her utility at either 6 or 12 hours of work.

Show in a graph why Sarah is indifferent between working 6 or 12 hours.
If Sarah’s overtime wage falls to $8 per hour, what can you say about how many hours Sarah wants to work?
If Sarah’s overtime wage rises to $12 per hour, what can you say about how many hours Sarah wants to work?

Solutions

Expert Solution

(a) the indifference curve measures the marginal rate of substitution between the ledger and the income. It shows the trade-off between income and leisure. this trade off means how much income the individual will be earning to accept for one hour sacrifice of his leisure time.

Here, Sara is satisfied because her income is increasing by sacrificing herleisure. When she is working for 6 hours her income is less but rest leisure time are more. And it gives more satisfaction.

(B) it should be noted that leisure is a normal commodity which means when the income increases it leads to increase in leisure enjoyed.

Rise and fall in wage rate has both the substitution and income effects.

Any decrease in the wage will also decrease the opportunity cost or the price of leisure. Therefore as the result in the fall in wage rate the individual substitute pleasure for work which leads to decrease in the supply of labour.

So when the wage rate decreases the number of hours will also decrease.

Rahul Sunny answered 1 year ago

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