Question

Consider the basic leisure-consumption model of labour supply, and assume (in the absence of any restrictions) that an individual optimally chooses h=10 hours of work, and L=100 hours of leisure. The government considers new regulation that would require every individual, if they choose to supply positive hours, to work at least 20 hours. What effect would this have on the choice of hours (h) for this individual?

Answer 1

New regulations requiring a minimum of 20 hours of work would force an individual previously choosing 10 hours of work to either increase their labor hours or withdraw from labor supply, impacting their utility maximization and leisure time.

Step-by-step explanation:

In the basic leisure-consumption model of labour supply, when an individual optimally chooses 10 hours of work and 100 hours of leisure and then faces a new regulation requiring them to work at least 20 hours if they choose to supply positive hours, this government action disrupts the individual's utility maximization.

The individual previously selected a point along their labor-leisure budget constraint that provided them the most satisfaction, balancing income and leisure. With this new regulation, the individual's labor supply decision is constrained and they must now choose whether to work the minimum 20 hours or not to work at all since working a lesser amount is no longer an option.

Assuming the individual still wishes to participate in the labor market, they will be compelled to increase their working hours from 10 to 20, resulting in a reduced leisure time. This change not only shifts their position on the labor-leisure budget constraint but might also prompt a re-evaluation of their utility maximization due to enforced changes in the trade-off between labor and leisure.