Homework 25: Key

1.	Consider the choice between leisure and income for a worker who faces a wage of $10 per hour if she works.
	a.	Using a diagram with leisure on the horizontal axis and income on the vertical axis, diagram this worker's budget constraint. Be sure to label the values for the budget-line endpoints.
	b.	Suppose the worker currently works 8 hours per day and claims her MRS is 12. Is she maximizing her utility? If so, explain why. If not, explain why not, and indicate whether she should consume more or less leisure. Use you diagram from part a to support your explanation. No--she should should work less, because value of leisure exceeds O/C of leisure. Answer key checklist: Did you show Ua as steeper than BL at l=16?
	c.	Now suppose that any hours worked over 8 result in "overtime pay" of $20 per hour. Draw the new budget constraint, and label the new budget-line endpoints. See kinked constraint for overtime. ($20 overtime wage)

2.	a.	Indicate which of the following, if any, would result in an upward-sloping demand curve for leisure: (1) leisure is an inferior good with the substitution effect larger than the income effect. (2) leisure is an inferior good with the income effect larger than the substitution effect. (3) leisure is a normal good with the substitution effect larger than the income effect. (4) leisure is a normal good with the income effect larger than the substitution effect. Answer: (4)
	b.	Use the stacked diagrams to the right to support your answer to part a. Draw an indifference curve-budget line diagram in the top panel, and use it to derive a leisure demand curve in the bottom diagram which has the wage (PL) on the vertical axis, and the quantity of leisure (l) on the horizontal axis.