Suppose George views leisure as a normal good. He works at a job that pays w an hour. Use a labor-leisure analysis to compare the effects on the hours he works from a marginal tax rate on his wage, x, or a lump-sum tax (a tax collected regardless of the number of hours he works), T. If the per-hour tax is used, he works 10 hours and earns (1-x)10w. The government sets T = a10w, so that it earns the same from either tax. The budget constraint without taxes L¹ is illustrated in the figure to the right. Let the price of a unit of consumption be $1.00 such that 10w units of consumption correspond to income of $10w. 1.) Use the line drawing tool to draw the new budget constraint with an income tax. Label this line 'L''. 2.) Use the line drawing tool to draw the new budget constraint with a lump-sum tax. Label this line 'LL. Carefully follow the instructions above, and only draw the required objects. Y, Goods per day 10w 10w(1-tax rate) Time constraint 10: L, Leisure hours per day

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
Suppose George views leisure as a normal good. He works at a job that pays w an hour. Use a
labor-leisure analysis to compare the effects on the hours he works from a marginal tax rate on his wage,
α, or a lump-sum tax (a tax collected regardless of the number of hours he works), T. If the per-hour tax is
used, he works 10 hours and earns (1-x)10w. The government sets T = α10w, so that it earns the same
from either tax.
The budget constraint without taxes L¹ is illustrated in the figure to the right. Let the price of a unit of
consumption be $1.00 such that 10w units of consumption correspond to income of $10w.
1.) Use the line drawing tool to draw the new budget constraint with an income tax. Label this line 'L''.
2.) Use the line drawing tool to draw the new budget constraint with a lump-sum tax. Label this line 'LL'.
Carefully follow the instructions above, and only draw the required objects.
Y, Goods per day
10w
10w(1-tax rate)
Time constraint
10:
L, Leisure hours per day
Transcribed Image Text:Suppose George views leisure as a normal good. He works at a job that pays w an hour. Use a labor-leisure analysis to compare the effects on the hours he works from a marginal tax rate on his wage, α, or a lump-sum tax (a tax collected regardless of the number of hours he works), T. If the per-hour tax is used, he works 10 hours and earns (1-x)10w. The government sets T = α10w, so that it earns the same from either tax. The budget constraint without taxes L¹ is illustrated in the figure to the right. Let the price of a unit of consumption be $1.00 such that 10w units of consumption correspond to income of $10w. 1.) Use the line drawing tool to draw the new budget constraint with an income tax. Label this line 'L''. 2.) Use the line drawing tool to draw the new budget constraint with a lump-sum tax. Label this line 'LL'. Carefully follow the instructions above, and only draw the required objects. Y, Goods per day 10w 10w(1-tax rate) Time constraint 10: L, Leisure hours per day
Expert Solution
steps

Step by step

Solved in 4 steps with 1 images

Blurred answer
Knowledge Booster
Tax Rates
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education