Question

The government imposes a progressive tax in which a person's first $20,000 of income are not taxed. If income is between $20,000 and $40,000 then it's taxed at 20%. If income is above $40,000 then the income is taxed at 30%. Suppose the person worked 42 weeks prior to the new tax system. Indicate whether the person's weeks of work will increase, decrease, or uncertain. Justify your answer by stating whether the change in the budget constraint leads to an income effect, substitution, or both.

The weekly wage was $1000 per week.

Answer 1