Question: Use the labor/leisure model to analyze the effect on hours of work of a law requiring employers to pay time and a half for hours worked over 40 per week.

1. First, draw a budget constraint for someone earning $8 per hour who receives $100 a week in nonlabor income. What now happens to the budget constraint with the time-and-a-half requirement?
2. Given your answer to (A), draw an indifference curve so that, given the original budget constraint, the person is working 40 hours per week. What now happens to hours of work given the new budget constraint? Draw an indifference curve to show this. Have hours of work increased or decreased as a result of the overtime law? Explain way.
3. In words, define the income and substitution effects. Next, use the graph to identify the income and substitution effects. Which is stronger?
4. If the wage had been increased for all hours worked rather than just for those after 40 per week, would the change in hours of work be any different? Show this in the graph and explain why or why not.

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