Problem
Sam is choosing between two jobs. One of the jobs is flexible and allows her to work as many hours as she chooses at $25 per hour. The other job requires that she works 40 hours per week and pays $1200 per week. Sam has a non-labor income of $250 per week, and she has a time endowment (maximum possible labor supply) of 100 hours per week.
• Draw the labor supply diagram with consumption on the vertical axis and non-market hours on the horizontal axis. Label the axes, maximum time allocated outside of the labor market (7), the budget constraint, non-labor income, the choices that Sam can make, and the consumption, hours of labor supplied to the market, and non-market hours if she chooses the fixed hours job.
• Explain how Sam will make the choice, using indifference curves to illustrate the economic logic. To do so, depict how different configurations of the indifference curves will lead Sam to prefer the flexible or fixed hours jobs.