Macroeconomics
Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
Question
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Chapter 3, Problem 7AP

a)

To determine

The proposal under which person S would supply a greater amount of labor.

b)

To determine

The proposal under which person F would supply a greater amount of labor.

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The top labour income tax bracket in Molvania applies to people with incomes of $500,000 and above. The elasticity of taxable income has been precisely estimated to be 1/6. The average income people in the top tax bracket is $1,000,000. Assuming society places no social welfare weight on people in the top tax bracket, what is the optimal top labour income tax rate in Molvania?
Consider an individual aged 64 who is eligible to collect full social security (public pension) benefits of $6,000 for a year. They have no other income but can work at a weekly wage rate of $600 for a maximum of 52 weeks. Receipt of benefits from the social security program is retirement tested. Specifically, the individual can earn up to $9,000 in annual wage income without a reduction in benefits; however, after $9,000 of earnings, benefits are reduced by 50% for every dollar earned, until the benefits are exhausted. a) Carefully draw and label the budget constraint for this individual. b) Suppose previously there was a retirement test, and then the test is eliminated, i.e., the individual now is allowed to keep all benefits, irrespective of their labour earnings. How would this affect the individual’s labour supply? Question Two David is a 70-year-old accountant. After serving his accounting firm for 45 years, David decides to retire soon. David has great passion for vintage cars…
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