Professor John is paid a wage of $50 per hour. His maximum amount of time available for
Question:
Professor John is paid a wage of $50 per hour. His maximum amount of time available for each week is 60 hours. Under the current income tax system, Professor John pays no taxes on the first $150 he earns per week, and after that pays 40% of his income in tax. Under this tax, Professor John chose to work 50 hours each week.
For the following questions:
1.1 Draw his before-tax budget constraint, after-tax budget constraint, and mark his optimal labor-leisure choice on the diagram. How much leisure that John enjoyed? How much pre-tax income that he made?
How much after-tax income that he made? and how much tax that he paid?
1.2 The government announces a new stimulus plan that will increase the amount that can be earned without tax to $250 per week. Under this tax system, Professor John now chose to work 40 hours. Please add his new after-tax budget constraint and new optimal labor choice on the diagram. Now, how much leisure that John enjoyed? How much pre-tax income that he made? How much after-tax income that he made? and how much tax that he paid?
Intermediate Accounting
ISBN: 978-0470161012
9th Canadian Edition, Volume 2
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield.