Consider an economy in which individuals choose between work time and leisure time. They spend all of their wages from work hours on consumption goods. Suppose that the government introduces an ad valorem tax of 26 percent imposed on all consumption goods and on leisure time. In the case of consumption, the tax applies to the expenditure amount. In the case of leisure time, the tax applies to the value of leisure time assessed at the individual's hourly wage from labor. What income tax rate is equivalent to this tax on consumption and leisure?

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Assume total 100 hrs available in a tax period and the wage rate is 1 per hour Below are three cases ... View the full answer