Anna and Xiaoqi both receive wage increases from $10 per hour to $12 per hour. Both can work a maximum of 80 hours a week. Before the wage increase, both work 40 hours. After the wage increase, Anna works 45 hours and Xiaoqi works 35 hours. [14 points]

a. Draw and explain 2 indifference curve diagrams, one for each worker, and compare the income and substitution effects of the wage increase.

b. After Anna and Xiaoqi receive their wage increases, the government imposes a tax of 20% on weekly earnings above $450. What happens to the hours worked by Anna (Hint: compare after-tax income, price of leisure, and hours of work before and after the pay increase) and Xiaoqi after this tax is imposed? Show the after tax budget constraint on the diagrams for each woman, and explain where they will maximize utility after the tax is imposed.

Answer rating: 100% (QA)

a The slope of the budget constraint becomes steeper for both women For both the price of leisure ri... View the full answer