1 Taxes and consumption - leisure choice (Ch. 21) Suppose that you can earn $20 per hour before taxes and can work up to 168 hours per week. Consider two income tax rates, 5% and 10%. a. On the same diagram, sketch the two weekly consumption - leisure budget constraints reflecting the two different tax rates. b. Sketch a set of representative indifference curves such that the income effect of the tax increase outweighs the substitution effect. c. Draw a set of representative indifference curves such that the substitution effect of the tax increase outweighs the income effect. Taxes and consumption-leisure choice (Ch. 21) Suppose that you can earn $20 per hour before taxes and can work up to 168 hours per week. Consider two income tax rates, 5% and 10%. a. On the same diagram, sketch the two weekly consumption-leisure budget constraints reflecting the two different tax rates. b. Sketch a set of representative indifference curves such that the income effect of the tax increase outweighs the substitution effect. c. Draw a set of representative indifference curves such that the substitution effect of the tax increase outweighs the income effect.

4. The Laffer curve Government imposed taxes cause reductions in the activity that is being taxed, which has important implications for revenue collections. To understand the effect of such a tax, consider the monthly market for champagne, which is shown on the following graph. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. BRUNENSE 8 5 1000 Suppose the government imposes a $10-per-case tax on suppliers. At this tax amount, the equilibrium quantity of champagne is - 700 400 500 430 300 200 100 1000 Now calculate the government's tax revenue if it sets a tax of $0, $10, $20, $25, $30, $40, or $50 per case. (Hint: To find the equilibrium quantity after the tax, adjust the "Quantity"field until the Tax equals the value of the per-unit tax.) Using the data you generate, plot a…

7. Suppose that you can earn $16 per hour before taxes and can work up to 80 hours per week. Consider two income tax rates, 10% and 20%. a. On the same diagram, draw the two weekly consumption-leisure budget constraints reflecting the two different tax rates. b. Draw a set of representative indifference curves such that the income effect of the tax increase outweighs the substitution effect. c. Draw a set of representative indifference curves such that the substitution effect of the tax increase outweighs the income effect.

Consider your decision about how many hours to work.   The following graph shows your budget constraint assuming that you pay no taxes on your income.   On the following graph, show the effect of a 15 percent income tax on your budget constraint.    In order for the overall effect of an income tax to cause the number of hours worked to increase, the income effect must be (greater than , less than , the same as) ?    the substitution effect.