Question: Tamara has 80 hours per week that she can allocate to work or leisure. Her job pays a wage rate of $20 per hour, but

Tamara has 80 hours per week that she can allocate to work or leisure. Her job pays a wage rate of $20 per hour, but Tamara is being taxed on her income in the following way. On the first $400 that Tamara makes, she pays no tax. That is, for the first 20 hours she works, her net wage-what she takes home after taxes-is $20 per hour. On all income above $400, Tamara pays a 75% tax. That is, for all hours above the first 20 hours, her net wage rate is only $5 per hour. Tamara decides to work 30 hours. Her indifference curves have the usual shape.
a. Draw Tamara's time allocation budget line for a typical week. Also illustrate the indifference curve at her optimal choice.
The government changes the tax scheme. Now only the first $100 of income is tax-exempt. That is, for the first 5 hours she works, Tamara's net wage rate is $20 per hour. But the government reduces the tax rate on all other income to 50%. That is, for all hours above the first 5 hours, Tamara's net wage rate is now $10. After these changes, Tamara finds herself exactly equally as well off as before. That is, her new optimal choice is on the same indifference curve as her initial optimal choice.
b. Draw Tamara's new time allocation budget line on the same diagram. Also illustrate her optimal choice. Bear in mind that she is equally as well off (on the same indifference curve) as before the tax changes occurred.
c. Will Tamara work more or less than before the changes to the tax scheme? Why?

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a If Tamara consumes 80 hours of leisure she has no income For every hour she works up to 20 hours she earns a net 20 per hour That is if she works 20 ... View full answer

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