SMU Classification: Restricted
ECON 201- INTERMEDIATE MACROECONOMICS
Assignment 2
Ismail Baydur
Deadline: 13th February, 2025 at 06:00pm
Instructions:
 Please submit a group assignment.
 Make sure that you submit your assignment electronically through eLearn before the
next lecture. Late submissions or other types of submissions (e.g. e-mail) are not
accepted.
 Please submit a single file in PDF format. You may submit a clear scan of your answers,
but make sure that your handwriting is legible to avoid any grading penalty.
1. Suppose that a consumer can earn a higher wage rate for working overtime. That is, for
the first q hours the consumer works, he receives a real wage rate of w1, and for hours
worked more than q he receives w2 such that w2>w1. Suppose that the consumer pays
no taxes and receives no non-wage income, and he is free to choose hours of work.
a. Draw the consumer’s budget constraint, and show his optimal choice of
consumption and leisure.
b. Show that the consumer would never work q hours, or anything very close to q.
Explain the intuition behind this.
c. Determine what happens if the overtime wage rate w2 increases. Explain your
results in terms of income and substation effects. You must consider the case of
a worker who initially works overtime, and a worker who initially does not work
overtime.
Enjoy!