Suppose that the production possibility frontier of the economy is given by C=100(h-l)-G. If the consumer faces a tax t on labor income, the slope of the consumer's budget constraint is... O The same as the slope of the production possibility frontier O Less than the slope of the production possibility frontier O More than the slope of the production possibility frontier O Not enough information

Suppose that the production possibility frontier of the economy is given by C=100(h-l)-G. If the consumer faces a tax t on labor income, the slope of the consumer's budget constraint is... O The same as the slope of the production possibility frontier O Less than the slope of the production possibility frontier O More than the slope of the production possibility frontier O Not enough information

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A worker receives a wage rate w and has L hours of leisure every day (the total endowment of hours is 24 hours per day). The government gives a subsidy of rate s of her income (i.e. her income is (1+s) times what it would be without the subsidy). The worker cannot save, and initially faces no tax. She consumes a single consumption good, c. 1. Write a budget constraint for this individual and plot it. 2. Suppose that the worker has well-behaved preferences, i.e. she likes more consumption and leisure rather than less, she dislikes working, and she has decreasing marginal utility in consumption and leisure. a. Display graphically what the optimal consumption-leisure choice for this worker (no need for exact numbers as we don’t know the utility function; give intuition) 3. Imagine that instead of a subsidy rate, s, the government imposes income tax at rate t. What is the new budget constraint? Display on the same picture. In the new optimum, is the consumption higher? Explain the answer…
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