Suppose a country passes a law that cuts the standard workday from 8 to 7 hours. Overtime (hours worked per day beyond the “standard” workday) in this country is paid at 50% above the normal wage rate. Please answer the following questions related to the work incentives facing workers in this country:

a. Draw the old budget constraint (in leisure/income space), showing the overtime premium after 8 hours of work per day.

b. On your diagram in (a), draw in the new budget constraint.

c. Use your diagrams in (a) and (b) to analyse the change in work incentives facing workers in this country as a result of this new law.

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Solution a The old budget constraint would show the tradeoff between leisure and income before the l... View the full answer