Consider two individuals with endowments of T = 60 hours (per week) of leisure, non-labour income of Y, and a wage of $7.50 per hour. At this wage, assume that workers are constrained by their employers to work 40 hours per week, or not at all.

A) On a labelled diagram, show the equilibrium for a worker for whom 40 hours is the optimum labour supply and a worker who would like to work 20 hours, but still prefers the 40 hour week to not working. Compare the marginal rates of substitution for the individuals at 40 hours per week.

B) The average part-time wage is $7 per hour, in contrast to $7.50 wage for full-time workers. Using the above model, provide an explanation for this difference in wage rates.

Answer rating: 100% (QA)

Refer the diagram which depicts the incomeleisure model where the horizontal axis represents leisure ... View the full answer