Suppose the U.S. passes a law that cuts the standard work day from 8 to 7 hours. Suppose that overtime (hours worked per day beyond the "standard" workday) is paid at 50% above the normal wage rate (1.5W) under both definitions of the standard workday. Answer the following problems related to the work incentives facing workers:
Graph the old budget constraint (in leisure/income space), showing the overtime premium after 8 hours of work per day. Assume a maximum work day of 16 hours as we have been doing in class, and be precise about where on the constraint overtime pay kicks in.
On your graph in (a), draw in the new budget constraint that sets the standard day at 7 hours.
Use your diagrams in (a) and (b) to analyze the change in work incentives facing workers as a result of this new law changing the standard work day. Be sure to consider different segments of the new vs. old constraints.