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P.6.2 [26 points] Consider workers who are able to choose their weekly work hours, in the standard setup of the neoclassical model of daily labor
P.6.2 [26 points] Consider workers who are able to choose their weekly work hours, in the standard setup of the neoclassical model of "daily" labor supply. The horizontal axis shows up to 16 daily hours that the worker can allocate to leisure or work. Time spent commuting to work is time that is not enjoyable. With the right podcast or talk radio, it might be less awful, but let us model commuting time as a net loss of leisure time that is not formally compensated through work. Consider workers who live around a metro area called the San Benezet Bay Area, who must spend 2 hours each day commuting around a large bay if they choose to work any amount of time, and there are no alternatives to commuting if any work is chosen. This hour of commuting is not paid, and the worker cannot telecommute. (Perhaps they work at Elon Musk's Twitter.) But if the worker chooses not to work, they do not commute and do not spend time commuting. All workers receive the same moderately small amount of daily nonlabor income Y, perhaps $75, which creates a "kink" in the budget constraint in the usual way. Now imagine that policymakers propose building a new bridge over San Benezet Bay, which will cut the daily commute time roughly in half. The proposal envisions funding the bridge with a large philanthropic donation, so it would come with no user fees (i.e., tolls) nor tax increases. (a) [2 points, no answer is incorrect] Before starting on this analysis, briefly explain what you think the impact of the new bridge would be on local labor supply. Would it increase labor supplied, reduce it, or not affect it? [No answer is incorrect. We will return back to | this answer in order to examine how your intuition held up. I suggest you just write your honest "hot take" on this question here.](b) [2 points] Draw a budget constraint that shows leisure time (x) versus money income (y), showing the time cost of commuting, which is only relevant for workers who work strictly positive hours, and a wage rate w. Assume potential workers have 16 hours of daily time to split between leisure and work. Depict the budget constraint without the bridge, when the time cost of commuting is relatively large. (c) [2 points] Describe the two broad types of optimal labor supply choices that are likely to emerge with this budget constraint. In other words, there should be two qualitatively different spots on the budget constraint where two different sets of indifference curves are tangent. Identify and briefly discuss them
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