Question

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%.
a. On the same diagram, draw the two weekly consumption–leisure budget constraints reflecting the two different tax rates.
b. Draw a set of representative indifference curves such that the income effect of the tax increase outweighs the substitution effect.
c. Draw a set of representative indifference curves such that the substitution effect of the tax increase outweighs the income effect.


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  • CreatedApril 25, 2015
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