Consider an individual who must drive to his place of work. Assume that there are 16 available hours in the day (that he can spend on commuting and work), that his wage rate is $40 per hour, and that he has nonlabour income of $200 per day. The commute takes two hours each way, and it costs $80 in expenses for the round trip. 1. Using a work-leisure diagram, illustrate his reservation wage, given that he does choose to work under the described conditions. (2) 2. In the same work-leisure diagram, depict his labour supply choice (clearly showing optimal hours of work per day). (2) 3. Suppose he has found a shorter route to work, so that his commute now takes one hour each way (but it still costs $80 in expenses for the round trip). Everything else remains the same. Show the new budget line and the new labour supply choice. Does he choose to work more hours, fewer hours, or the same number of hours per day as he did with the longer commuting trip? Explain (assume leisure is a normal good). (6)

Consider an individual who must drive to his place of work. Assume that there are 16 available hours in the day (that he can spend on commuting and work), that his wage rate is $40 per hour, and that he has nonlabour income of $200 per day. The commute takes two hours each way, and it costs $80 in expenses for the round trip. 1. Using a work-leisure diagram, illustrate his reservation wage, given that he does choose to work under the described conditions. (2) 2. In the same work-leisure diagram, depict his labour supply choice (clearly showing optimal hours of work per day). (2) 3. Suppose he has found a shorter route to work, so that his commute now takes one hour each way (but it still costs $80 in expenses for the round trip). Everything else remains the same. Show the new budget line and the new labour supply choice. Does he choose to work more hours, fewer hours, or the same number of hours per day as he did with the longer commuting trip? Explain (assume leisure is a normal good). (6)