You graduate from college and take a job at a consulting firm with a wage of $25 per hour. Your job is extremely flexible: you can choose to work any number of hours from 0 to 2,000 per year.
a. Suppose there is an income tax of the following form:
Income up to $10,000: no tax
Income from $10,000–$30,000: 20% tax rate
Income from $30,000 up: 30% tax rate
a. Draw a graph in hours worked/consumption space, showing your opportunity set with and without the tax system. With the tax system in place, are there any points that you are particularly unlikely to choose? Why or why not?
b. Say you choose to work 1,500 hours per year. What is your marginal tax rate? What is your average tax rate? Do these rates differ? Why or why not?
c. Suppose that the two tax rates are increased to 25% and 50%. What is the likely effect on the labor supply of men? What is the likely effect on the labor supply of married women? Explain how the responses might differ between these groups, both in terms of underlying economic effects and in terms of the empirical evidence on labor supply responses.

  • CreatedApril 25, 2015
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