Question

Consider the labor-leisure choice model. Assume that the labor supply elasticity with respect to after tax wages is 0.15. Assume that individuals currently pay a 70% marginal tax rate on wage income. The government plans to increase the marginal tax rate in order to increase tax revenue. Will this work? Explain.

Answer #1

A tax elasticity of labour supply of 0.15 indicates that a 1% increase in tax rate will reduce labour supply by 0.15%. The total tax collected is the product of the total labour force and the tax rate. Now the tax rate increases by 1%, but the labour force only decreases by 0.15%, so the total tax actually increases due increase in tax rate. Therefore, the tax increase will help in increasing tax revenue.

Suppose the labour supply is L and tax rate is 70%. The tax collected is 0.7L.

Now tax increases to 71% and labour supply decreases to L - 0.0015 L = 0.9985 L. The new tax collected is 0.7089L, which is greater than 0.7L.

If the wage elasticity of labor supply is negative, what can we
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sizes of the income and substitution effects? Is leisure a normal
or inferior good in this case? Will a fall in the tax rate on
earnings increase or decrease tax revenues?

At a workers utility maximizing level of leisure and income,
their marginal utility with
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income is X, their hourly
wage is $6, and their non-labor income is $50. What must X
equal?
A. 5/56
B. 5/6
C. 30
D. 6
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A. will increase
B. will decrease
C. may increase or decrease...

2. Check each of the following that are true concerning
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when the substitution effect is greater then the income
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the substitute effect has the same impact on the worker
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the substitute effect has the opposite impact on the
worker as the income effect
the income effect applies when people choose more
leisure and less work
If (MPL/cost of labor) is greater than (MPC/cost...

1) It is important to assume that leisure is a normal good?
Explain why or why not.
2) Suppose that consumers pay tax on their wage income. First
redraw the consumer's budget constraint considering this
percent-tax. Then, show how this effects the labor supply
curve.
3). What happens to the equilibrium level of labor after a
decline in the level of technology?
4). Suppose the cost of renting capital increases(shown by an
increase in r).
a) what happens to the...

Consider the static labor supply model discussed in class, and
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supply and consumption according to the following maximization
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a) Assume that non-labor income Y = 100$ and that the wage rate is
w = 10$/hour. Find the individual’s optimal level of labor supply
(h) and his optimal level of consumption (c). b)...

Consider the following labour-leisure choice model. U(C,L) =
C^(2/3)L^(1/3)
C = wN + π – T
H= N+ L Where
C: consumption
L: leisure
N: hours worked
H = 50 : total hours
w = 4 : hourly wage
π = 20 : non-labor income T = 10 : lump-sum tax
Suppose the hourly wage changes to w = 5. Perform a decomposition
and calculate the substitution, income and total effect for each C,
L, N

Suppose that there are currently no income taxes, but a tax of
$4/hour is under consideration. (Note that this is a little
different from how income taxes usually work - it is a fixed dollar
amount per hour rather than a percentage of wages. It will be
easier to work with this specifixation.) As it is, employees hire
250 billion hours of labor services per year at an average wage of
$15/hour, but if the tax passes employment will be...

1. The income leisure trade off
a. means that individuals enjoy making trades during their
leisure time.
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c. is the basis of the neoclassical theory of labor supply
d. means that individuals would rather work than enjoy
leisure.
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In the labor-leisure model, the representative consumer receives
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Santi derives utility from the hours of leisure (l) and from the
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l) = c 2/3 l 1/3 . Assume that all hours not spent working are
leisure hours, i.e, h + l = 24. The price of a good is equal to 1...

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