Problem Set #3 –Labor Supply Policy Applications
Submit your solutions via Canvas by Midnight (Eastern Time Zone) on Sunday 9/6
1) Suppose a worker has V=0, earns $20/hour, and has 100 hours of discretionary time a week.
a) Graph this worker’s weekly budget constraint.
b) Now suppose that a new government policy expands eligibility for overtime, so that this worker receives “time and a half” ($30/hour) overtime if she works over 40 hours per week. Show on the graph above how this changes her budget constraint [use a dashed line].
c) Using indifference curves, show and discuss how the availability of overtime will affect the hours of work decision. Show that some workers will be affected by the availability of overtime and some won’t (who won’t?).
2) Suppose that the American Bar Association wants to improve access to legal services for the poor. Here are some options:
Option A: Every lawyer would be required to donate 10 hours of work per month to low-income clients, free of charge
Option B: Lawyers who earn $10,000 or more in a given month would have to donate $1000 to a fund. The ABA would use this fund to provide legal aid to low-income individuals.
Consider a lawyer who has 400 hours of discretionary time a month and makes $100/hour (for simplicity, assume V=0). Draw this lawyer’s monthly budget constraint under each of the two options.
