Audrey's preferences for consumption (c) and leisure (1) can be expressed as U (c, l) = c-be² 1. There are 168 hours per week available to split between leisure (1) and work (h). Audrey earns $10 per hour, which is subject to labor income tax at a rate of 7. 

(a) Graphically illustrate Audrey's budget constraint. Put working hours (h) on the x-axis and the consumption on the y-axis. Label the intercepts and the slope of her budget line. 

(b) Find Audrey's optimal amount of consumption e* and labor supply h*. 

(c) Suppose Audrey's hourly wage rate is flat at $10 and subject to income taxes at 7 = 0.5. The government proposes a negative income tax whereby everyone is given $300 each week and anyone can supplement her income further by working. To pay for the negative income tax, the payroll tax rate will be increased from 50% to 75%. On a single graph, draw Audrey's original budget line from part (a) and her budget line under the negative income tax. Will Audrey's utility be greater under the negative income tax?

Answer rating: 100% (QA)

a Graphically illustrating Audreys budget constraint The budget constraint can be illustrated graphically Put working hours h on the xaxis and the con... View the full answer