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

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

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