Question

Suppose that you have a job with a wage of $25 per hour. The job is extremely flexible: you

can choose to work any number of hours from 0 to 2,000 per year. The income tax system

is as follows.

•Income up to $10000: no tax.

•Income from $10000 to $30000: 20% tax rate.

•Income from $30000 up: 30% tax rate.

(a) Draw a graph in leisure hours/consumption space, showing your opportunity set with

and without the tax system. Label the intercepts, slopes, and coordinates of the kinks

if there is any.

(b) Suppose that you choose to work 1,500 hours per year. What is your marginal tax

rate? What is your average tax rate? Show your work.

(c) Compare your situation that you choose to work 1,500 hours under the above tax

system with the one that there is no tax at all at any level of income.

(i) You would work more if there is no tax. Draw a set of indifference curves on a

separate graph as in (a) that reflect your choice with tax (work 1,500 hours) and

without tax (work more than 1,500 hours). Which effect dominates: income or

substitution effect?

(ii) You would work less if there is no tax. Draw a set of indifference curves on a

separate graph as in (a) that reflect your choice with tax (work 1,500 hours) and

without tax (work less than 1,500 hours). Which effect dominates: income or

substitution effect?

Answer #1

Suppose you have 24
hours per day that you can allocate between leisure and
working.
(i)
Draw the budget constraint between
“leisure hours” on the horizontal axis and “wage income” on the
vertical when the wage rate is $40 per hour. Mark an optimum point
A that is meaningful. Draw a new budget constraint when the wage
rate falls to $30 per hour. Show a new optimum point B.
(ii)
On your indifference curve diagram,
decompose the effect of the...

Wage rate is $10 per hour for a consumer, and he is choosing
earning of $10 per hour and taking leisure of 1 hour together.
a. Derive the mathematical equation and
draw the corresponding graph for daily income-leisure
constraint.
b. Draw the corresponding indifference
curve between earning and leisure.
c. How many hours will this
consumer work and how much will this consumer earn?

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%
Suppose the government just changedd the tax to 20% from 10%.
If the income effect outweighs the substitution effect, where on
your new budget will you reoptimize?

Ira’s only source of income is from working. He can work
as many hours per day as he wishes (up to a maximum of 24 hours) at
a fixed wage rate of $10 / hour.
a. Initially, assume that there is no income
tax.
Draw Ira’s budget constraint.
b. Now suppose, that the government introduces a tax
rate of 50 cents in the dollar. Suppose that leisure is a normal
good that tax ends up reducing Ira’s hours worked. Show...

1. Suppose we live in a world with no income
taxes, your total endowment of time is T = 50 hours and your hourly
wage rate is w = $10.
a. Sketch a graph of
your budget line that represents you labor-leisure trade off. The Y
axis should represent your income from labor and the X axis should
represent you leisure time. Label the combination of income and
leisure that maximizes your utility as well.
b. Now assume a
proportional...

Ira’s only source of income is from working. He can work as many
hours per day as he wishes (up to a maximum of 24 hours) at a fixed
wage rate of $10 / hour.
b. Suppose, that the government introduces a tax rate of 50
cents in the dollar. Suppose that leisure is a normal good that tax
ends up reducing Ira’s hours worked. Show in your diagram the
effect of the tax on Ira’s budget constraint and possible...

Suppose a single parent can work up to 16 hours per day at a
wage rate of $10.00 per hour. Various income maintenance programs
have been developed to assure a minimum level of income for
low-income families. Aid to Families with Dependent Children (AFDC)
was established with the Social Security Act of 1935. The family
was given an income subsidy depending on family size. Under this
program, the family’s benefit was reduced by $1 for every dollar
earned. Suppose the...

Suppose you study 3 hours per day and your test grade was 70.
For each member of the group, draw an indifference curve
representing combinations of grade and free time that would give
you equal satisfaction. Discuss reasons for why your indifference
curves might be different/the same.

Suppose Mary has utility U = C+20L i.e. Mary gets the same utils
from $20 of consumption or 1 hour of leisure. Further, assume that
Mary can make $15/hour at her job and has absolutely no savings.
Lastly… assume Mary must sleep 8 hours a day (which counts as
neither work nor leisure), but can work and/or leisure up to the
remaining 16 hours (with fractional hours of work / leisure allowed
as well). Mary is trying to figure out...

a) Suppose that John can work up to 2,000 hours per year at a
wage of $10.00 per hour, that he has no other source of income, and
there is not yet TANF program in place. Draw his budget constraint
(name it Figure 1.1). Explain how you constructed the graph. What
is the slope of the budget constraint? Explain the slope.
(b) Now, let’s introduce a TANF program. Consider an income
guarantee program with an income guarantee of $5,000 and...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 1 minute ago

asked 1 minute ago

asked 4 minutes ago

asked 4 minutes ago

asked 5 minutes ago

asked 10 minutes ago

asked 10 minutes ago

asked 10 minutes ago

asked 11 minutes ago

asked 11 minutes ago

asked 11 minutes ago

asked 11 minutes ago