Question 1. Suppose that current workers’ compensation policy (A) provides employees injured on the job a payment of $X each year whether they work or not. Suppose the government were t

1. Suppose that current workers’ compensation policy (A) provides employees injured on the job a payment of $X each year whether they work or not. Suppose the government were to implement a new program (B) in which those who did not work at all got ½ $X per year but those who did work got ½ $X plus workers’ compensation of 50 cents for every hour worked. So, in other words, the constraint under policy A is the fixed payment plus the wage rate [($X) + W], and under policy B it is [.5($X) + 1.5W].

Graphically depict the wage constraint for (1) no policy, (2) policy A, and (3) policy B.

What impact does policy A have on labor supply compared to no policy at all?

What would be the change in work incentives associated with policy B compared to policy A?

The graph associated with this problem should be large and on a separate sheet of paper. Be sure to calibrate each axis very precisely.

2. There is a proposal to increase the federal minimum wage to $10.10. If 16 hours per day are available for work and leisure, graphically represent the daily wage constraint for a worker who was earning the minimum wage rate of $7.25 and the new budget constraint after the increase.

Discuss the theoretical impact of the proposed higher minimum wage on labor supply.

More specifically, under the current $7.25/hour minimum wage suppose Joe’s desired hours of work is 3 hours per day, and for Bill it is 7 hours per day. Compare and discuss the relative magnitudes of the substitution and income effects of the higher minimum wage for workers like Joe versus workers like Bill.

3. 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 questions 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

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