The basic labor supply model assumes that wage income is untaxed. Suppose instead that a set...

 

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The basic labor supply model assumes that wage income is untaxed. Suppose instead that a set of marginal tax rates was imposed such that the first 6 hours of labor were untaxed, the next 10 hours of labour were taxed at a rate equal to t (for example t=25%), and all labour thereafter was taxed at a rate equal to 2t (in the example, that would mean a tax rate of 50%). a) (5 points) Show on a graph how this would affect the budget line. b) (10 points) How might this alter the labour supply of individuals? Make sure you provide a complete answer including considerations of labour supply at the extensive and intensive margins (corner and interior solutions) before and after the tax. The basic labor supply model assumes that wage income is untaxed. Suppose instead that a set of marginal tax rates was imposed such that the first 6 hours of labor were untaxed, the next 10 hours of labour were taxed at a rate equal to t (for example t=25%), and all labour thereafter was taxed at a rate equal to 2t (in the example, that would mean a tax rate of 50%). a) (5 points) Show on a graph how this would affect the budget line. b) (10 points) How might this alter the labour supply of individuals? Make sure you provide a complete answer including considerations of labour supply at the extensive and intensive margins (corner and interior solutions) before and after the tax.

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a The budget line in the basic labour supply model is given by W ph 1twh Where W is the total wealth ... View the full answer