Question:

Cathy works for 8 hours per day at a store in Ann Arbor, conveniently just around the corner from where she lives, Her hourly wage is $\$ 12$. Her income allows her to live comfortably and Cathy is quite pleased with her situation. Given the circumstances, she wouldn't change a thing. Then her son Ben is born. After staying home with the baby during the first few months, Cathy returns to her job at the old wage. It hasn't been easy to find a babysitter. Fortunately, she found Carla, whom she trusts and who takes care of Ben for $\$ 6$ an hour while Cathy works. The only drawback is that Carla lives in Ypsilanti so that Cathy loses an hour of each day taking Ben to añd from Carla's.

Assume leisure and consumption are both normal goods for Cathy. Use the labor leisure choice diagram to answer the following questions (neglect that Cathy's preferences for consumption might have changed due to the birth of the baby):

1. Is Cathy still happy with her 8 hour job or would she like to increase or decrease her hours?
2. If Cathy's preferences were such that they display no income effect would your qualitative answer to a) change?
3. Assume that Cathy has found an arrangement with her employer that she likes, so given her childcare setup she wouldn't want to change her hours. Also assume both leisure and consumption are normal goods again. One day, Carla suggests that she could come to Ann Arbor in the mornings and evenings and pick up and return Ben herself. She would charge an additional $\$ 6$ for the driving every day. Will Cathy agree to this new arrangement if she can choose her work hours freely?
4. Which charge for the driving of Ben would make Cathy just indifferent between Carla picking him up and her dropping him off herself?

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Deliverable: Word Document