Suppose that the government imposes a proportional income tax on the representative consumer’s wage income. That is, the consumer’s wage income is: ?(1 − ?)(ℎ − ?) where t is the tax rate. What effect does the income tax have on consumption and labor supply? Explain your results in terms of income and substitution effects.

Suppose that the government imposes a proportional income tax on the representative consumer’s wage income. That is, the consumer’s wage income is: ?(1 − ?)(ℎ − ?) where t is the tax rate. What effect does the income tax have on consumption and labor supply? Explain your results in terms of income and substitution effects.

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter15: Fiscal Policy

Section: Chapter Questions

Problem 10SQP

See similar textbooks

Similar questions

Suppose that the government imposes a proportional income tax on the representative consumer’s wage income. That is, the consumer’s wage income is w(1 − τ )(h − l) where τ is the tax rate. (a) Determine effect of a decrease in income tax on consumption and labor supply. Explain your results in terms of income and substitution effects. Show the income and substitution effect in a graph. (b) Is your answer in (1) consistent with the observation that hours of work in European countries is about 30% less than in the U.S, while the average income tax rate is about 60% in European countries and 40% those in the U.S.? Under what condition? Please show all your work. Please do all parts of eth question. Thank you for yourhelp.
Assume you can work as many hours you wish at £12 per hour (net of tax). If you do not work, you have no income. You have no ability to borrow or lend, so your consumption, c, is simply equal to your income. Now assume that you receive an income of £140 per week from an unknown benefactor. Show the impact on your feasible set, and show a new optimal choice in which consumption increases but labour supply decreases. Using the concept of the marginal rate of substitution, explain why this is a likely outcome.
The Laffer curve suggests which of the following? a. the optimal tax rate on labor income is 0% b. an increase in tax rates leads to an increase in labor supply. c. there is some maximum amount of tax revenue that the government can collect from taxing income. d. the optimal tax rate leads to the highest amount of tax revenue.
The one-period model with quasi-linear utility predicts that a decrease in marginal income tax rates could increase tax collection if:Group of answer choices Substitution effects dominate income effects so that the percent change in taxes is greater than the percent change in GDP Substitution effects dominate income effects so that the percent change in taxes is less than the percent change in GDP Income effect dominate substitution effects so that the percent change in taxes is less than the percent change in GDP Income effects dominate substitution effects so that the percent change in taxes is greater than the percent change in GDP
Suppose that the cost of living increases, thereby reducing the purchasing power of your income. If your money wage doesn’t increase, you may work more hours because of this cost-of-living increase. Is this response predominantly an income effect or a substitution effect? Explain.
Consider your decision about how many hours to work. The following graph shows your budget constraint assuming that you pay no taxes on your income. On the following graph, show the effect of a 15 percent income tax on your budget constraint. In order for the overall effect of an income tax to cause the number of hours worked to increase, the income effect must be (greater than , less than , the same as) ? the substitution effect.
The reason the substitution effect works to encourage a consumer to buy less of a product when its price increases is: a. the product is now relatively more expensive than it was before. b. other products are now relatively more expensive than they were before. c. the real income of the consumer has been increased. d. the real income of the consumer has been decreased
What is the tax wedge?choose correct option. A) A tax wedge is the difference between the pretax and posttax return to an economic activity, For example, a tax on labor income would increase the posttax return on working B) A tax wedge is the difference between the pretax and posttax return to an economic activity, for example, a tax on interest income would decrease the posttax return to investment. C) A tax wedge is the difference between the pretax and posttax return to an economic activity, for example, a tax on coporate income would decrese the pretax return to investment. D) A tax wedge is the difference between the pretax and posttax return to an economic activity, for example, a tax on dividends would increase the pretax return to investment.
Given the consumption function C = a + bY (with a>0, 0 < b<1): a. find its marginal function and its average function. b. find the income elsaticity of consumption ECY, and determine its sign, assuming Y > 0. c. Show the income that this consumption function is inelastic at all positive income levels
Mark can work up to 80 hours each week at a pre-tax hourly wage of $20 but faces a constant 20 percent tax on his earnings. Thus, Mark maximizes his utility by choosing to work 50 hours per week. The government proposes a negative income tax whereby everyone is given $300 per week and anyone can supplement their income further by working. To pay for the negative income tax, tax on earnings will be increased to 50 percent. On a single graph, draw Mark's original budget line and his budget line under the negative income tax. Show that Mark will work fewer hours if the negative income tax is implemented Will Mark's utility be greater under the negative income tax? Discuss your answer.
In Britain before 1870, both wages and hours worked rose, while after 1900 working hours fell as wages continued to rise. Based on this information, which of the following statements is correct? 1)After 1900, the substitution effect dominated the income effect, so that hours of free time rose. 2)In the period before 1870, the income effect dominated the substitution effect. 3)Sometime between 1870 and 1900 the substitution effect of a rise in the wage rate on the hours of free time changed from negative to positive. 4)The substitution effect dominated the income effect before 1870, but the income effect dominated the substitution effect after 1900.
All individuals have the same utility function over consumption, C, and leisure, L, given by U = C1/3L2/3, Denote the wage rate by w. The total time available for labour and leisure is equal to 12. The price of consumption is PC=1. Denote the amount of labour supplied as N. 1)Find the Labour supply function. 2)The government introduces a tax t=0.2 on wage, such that the after-tax wage is (1-t)w. How much tax revenue does the government collect on everyone? What is the effect on labour supply? 3)The government chooses instead to collect a fixed lump-sum T from everyone. What is the effect on labour supply?