Consider an economy with representative consumer that has preferences over consumption c and labor I given...

 

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Consider an economy with representative consumer that has preferences over consumption c and labor I given by the utility function: u(c, 1) = -1,7 0,7 <1 Y Inc - 1,70 The consumer is endowed with one unit of time. Each unit of labor sold in the labor market earns a competitive wage of w. Suppose the government imposes a proportional tax 7 on labor income. 1. Find the consumer's labor supply as a function of wage and the tax rate. (10 pts.) 2. Find the tax revenues as a function of wage and the tax rate. (10 pts.) 3. Is there a Laffer curve pattern in the tax revenues schedule? Explain the basic principle behind your finding. (10 pts.) 4. How would your answers to (1)-(3) change if 7 were instead a lump-sum tax on labor income? Explain. (10 pts.) Consider an economy with representative consumer that has preferences over consumption c and labor I given by the utility function: u(c, 1) = -1,7 0,7 <1 Y Inc - 1,70 The consumer is endowed with one unit of time. Each unit of labor sold in the labor market earns a competitive wage of w. Suppose the government imposes a proportional tax 7 on labor income. 1. Find the consumer's labor supply as a function of wage and the tax rate. (10 pts.) 2. Find the tax revenues as a function of wage and the tax rate. (10 pts.) 3. Is there a Laffer curve pattern in the tax revenues schedule? Explain the basic principle behind your finding. (10 pts.) 4. How would your answers to (1)-(3) change if 7 were instead a lump-sum tax on labor income? Explain. (10 pts.)

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