Myeconlab With Pearson Etext -- Access Card -- For Microeconomics
9th Edition
ISBN: 9780134143071
Author: PINDYCK, Robert, Rubinfeld, Daniel
Publisher: PEARSON
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Chapter 14, Problem 2E
To determine
Budget line and the effect on labor supply curve by the new program
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Consider a person who can work up to 80 hours each week at a pretax wage of $20 per hour but faces a constant 20 percent payroll tax. Under these conditions, the worker maximizes her utility by choosing to work 50 hours each week. The government proposes a negative income tax whereby everyone is given $300 each week and anyone can supplement her income further by working. To pay for the negative income tax, the payroll tax rate will be increased to 50 percent.a. On a single graph, draw the worker’s original budget line and her budget line under the negative income tax.b. Show that the worker will choose to work fewer hours if the negative income tax is a dopted.c. Will the worker’s utility be greater under the negative income tax?
One proposal for reforming the welfare system is to create a negative income tax. Under the negative income tax, each person is entitled to a grant of G dollars permonth. For every dollar the person earns, the grant is reduced by t dollars.
a. Suppose G = 200 and t = 0.40. Consider an individual whose hourly wage = $10. There are 30 days in a month, so the total allotment of T = 720. Sketch the budgetconstraint before and after the introduction of the negative income tax.
b. Would people work more or less with the implementation of this system?
c. What if t = 100%? Explain!
Assume that workers whoses are less than $8000 currently pay no federal income taxes. Suppose a new government program guarantees each worker $4000, whether or not he or she earns any income. For all earned income up to $8000, the worker must pay a 50- percent tax. Draw the budget line facing the worker under this new program. Using the line drawing tool, draw the new budget line facing a worker whose wage is such that his or her pre-tax earned income is less than $8000. Label this line 'BC2'.
Chapter 14 Solutions
Myeconlab With Pearson Etext -- Access Card -- For Microeconomics
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- What is the potential impact of income taxes on labor (consider the income effect and substitution effect)? Do you think it would be better to have a proportional income tax (flat tax) or progressive income tax? Explain.arrow_forwardAssume that workers whose are less than $8000 currently pay no federal income taxes. Suppose a new government program guarantees each worker $4000, whether or not he or she earns any income. For all earned income up to $8000, the worker must pay a 50- percent tax. How is the program likely to affect the labor supply curve of workers? For workers whose wages such that their pre-tax earned incomes are less than $8000, labor supply will be.. a. zero because there will be no incentive to work b. zero because there will be a negative income effect (in terms of work hours) c. zero because after-tax wages will be higher d. positive because after-tax wages will be higher e. positive because there will be a positive substitution effect (in terms of work hours)arrow_forwardConsider an income guarantee program with an income guarantee of $5,000 and a benefit reduction rate of 40%. A person can work up to 2,000 hours per year at $10 per hour. a. Draw the person’s budget constraint with the income guarantee. b. Suppose that the income guarantee rises to $7,500 but with a 60% reduction rate. Draw the new budget constraint c. Which of these two income guarantee programs is more likely to discourage work? Explain. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- Consider a society consisting of two people. Edison earns an income of $85,000 per year and Hilary earns an income of $25,000 per year. The government is considering a redistribution plan that would impose a 25% tax on Edison's income and give the revenue to Hilary. Without any incentive distortion, Edison would retain $63,750 and Hilary would end up with $46,250. However, let us assume that since Edison will not receive all the income he earns, he decides to work less and earn an income of only $75,000, of which 25%×$75,000=$18,75025%×$75,000=$18,750 will be owed in taxes. With the redistribution plan, Edison will take home an income of_________. . The $18,750 that Edison pays in taxes will be transferred by the government to Hilary. Let us assume that since Hilary now receives payment from the government, she will not work as many hours and will earn an income from work of only $24,000 instead of her initial $25,000. With the redistribution plan, Hilary's total…arrow_forwardExplain very briefly what you understand from income effect and substitutioneffects of change in income tax ratesarrow_forwardExplain the definitions assumed by the table and cite specific figures in the table to explain the middle-income trap. (b) Explain the causes of the middle-income trap according to Arias and Wen.arrow_forward
- Raka has 80 hours per week that she can allocate to work or leisure. Her job pays a wage rate of $20 per hour, but Raka is being taxed on her income in the following way. On the first $400 that she 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, Raka pays a 75% tax. That is, for all hours above the first 20 hours, her net wage rate is only $5 per hour. Her indifference curves conform to the usual assumptions about consumer preferences. Raka’s optimal choice is to work 30 hours.Draw Raka’s time-allocation budget line for a typical week.arrow_forwardNo written by hand solution Consider an income guarantee program with an income guarantee of $5,000 and a benefit reduction rate of 40%. A person can work up to 2,000 hours per year at $10 per hour. a. Draw the person’s budget constraint with the income guarantee. b. Suppose that the income guarantee rises to $7,500 but with a 60% reduction rate. Draw the new budget constraint c. Which of these two income guarantee programs is more likely to discourage work? Explain.arrow_forwardProcess A Output : x = 3; y = 1 Input: L = 2; K = 1 Process B Output : x = 2; y = 1 Input: L = 1; K = 2 Utility Function of indivs. : U=xy. L = 500 units; K = 500 units 1. In equilibrium, what are the relative prices of x, y, L and K? 2. What is the effect on the distribution of income by factor shares of (a) wage tax t on L employed and (b) excise tax e on y?arrow_forward
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