1) The graph below illustrates a worker's budget constraints and two potential indifference curves in the presence of fixed costs of working in both time and money. a) Where in the graph do we see the fixed cost of work in money? Where do we see the fixed cost of work in hours? b) Explain why the individual with the red indifference curves chooses not to work. If there were no fixed costs of work, would this person work? c) Building on the graph below, show that a marginal increase in the after-tax wage rate can cause a discrete change in hours worked for the person with the red indifference curves. d) Explain the difference between intensive and extensive margin labor supply responses. e) Empirical researchers studying the causal effect of policies like the Earned Income Tax Credit (eg Eissa & Leibman 1996 QJE) often estimate large extensive margin elasticities with respect to after-tax wages, and small or zero intensive margin elasticities. Explain why such findings would imply that it is important to include these fixed costs of work in our model of labor supply. Is this finding consistent with the view that fixed costs of work are important? Explain your answer. consumption c YF y slope (1-T)w hours worked h hF