Sara, newly graduated from college, has a job that pays $15 per hour, but which only allows her to work 35 hours per week maximum. She can moonlight for as many hours as she likes at the local used music store for $8 per hour. Her college loans are coming due, and she must pay $200 per month, whether she works or not. Her non-labor income is also equal to $200 per month.  

a) Draw Sara’s budget line between consumption and leisure.

b) Sara currently works 35 hours per week, and does not moonlight. She wishes, however, that she could work more hours at her $15/hour job. Draw in the indifference curve at her chosen point on the budget constraint. What can you say about her reservation wage for extra work (beyond 35 hours)?

c) Sara gets a raise at her job, from $15 to $20 per hour. Show the effect on her budget line. If her labor supply curve is not backward bending, can you rule out any of the following changes in her labor supply?

i) Sara works 35 hours at her current job, and moonlights for $8 per hour.

ii) Sara works 35 hours at her current job, and does not moonlight.

iii) Sara reduces her hours at her current job.