1 Taxes and consumption - leisure choice (Ch. 21) Suppose that you can earn $20 per hour before taxes and can workup to 168 hours per week. Consider two income tax rates, 5% and 10%. a. On the same diagram, sketch the twoweekly consumption - leisure budget constraints reflecting the two different tax rates. b. Sketch a set of representativeindifference curves such that the income effect of the tax increase outweighs the substitution effect. c. Draw a set ofrepresentative indifference curves such that the substitution effect of the tax increase outweighs the income effect.Taxes and consumption-leisure choice (Ch. 21)Suppose that you can earn $20 per hour before taxes and can work up to 168 hours perweek. Consider two income tax rates, 5% and 10%.a. On the same diagram, sketch the two weekly consumption-leisure budget constraintsreflecting the two different tax rates.b. Sketch a set of representative indifference curves such that the income effect of the taxincrease outweighs the substitution effect.c. Draw a set of representative indifference curves such that the substitution effect of thetax increase outweighs the income effect.

Detailed explanation:a. Consumption-leisure budget constraintThe consumption-leisure budget…

Answered: 1 Taxes and consumption - leisure…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.13P

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7. Suppose that you can earn $16 per hour before taxes and can work up to 80 hours per week. Consider two income tax rates, 10% and 20%. a. On the same diagram, draw the two weekly consumption-leisure budget constraints reflecting the two different tax rates. b. Draw a set of representative indifference curves such that the income effect of the tax increase outweighs the substitution effect. c. Draw a set of representative indifference curves such that the substitution effect of the tax increase outweighs the income effect.
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.
Suppose Shabna has a fixed income and she can consume only two goods and they are bread and butter. Suppose the government has imposed a tax on butter, how this will impact her consumption bundle. Support your answer with proper graph(s) showing equivalent variation and the government's tax revenue. Also, explain your understanding of equivalent variation.
2. Consider a society with only two people one rich and one poor-who have the same util- ity functions. These utility functions exhibit diminishing marginal utility. Suppose that taxes are set such that the total amount of utility that each person loses is the same. Does it follow that the tax will be progressive? Explain.
8. Problems and Applications Q8 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. Deborah is awake for 100 hours per week. Use the green line (triangle symbol) to draw Deborah's budget constraint if she earns $12 per hour. Then use the blue line (circle symbol) to draw her budget constraint if she earns $16 per hour. Finally, use the purple line (diamond symbol) to draw her budget constraint if she earns $20 per hour.
1-a Answer following questions by using the Cobb-Douglas utility function u= xx and assuming that the price of good 1 is pi and good 2 is p2. Assume 00, p2>0, and income I>0.
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5. Consider an economy with two goods, A and B. Suppose the price of good A is p and let the price of good B be 1. There is a large number of identical consumers. The indifference curves of consumers have the usual shape with diminishing marginal rate of substitution between the two goods. Suppose the government must raise a tax revenue of R, and can do this either by imposing a per-unit tax of t on good A, or by imposing a lump-sum tax T on each consumer. Which policy would the consumers prefer? Explain your reasoning carefully, using any appropriate diagram, and explain the intuition behind your result.
17 - Assume that a consumer has a given budget or income of $12 and that she can buy only two goods, apples or bananas. The price of an apple is $2.00 and the price of a banana is $1.00. If the consumer spent all of her budget on just apples or just bananas, how many apples or bananas maximum would she be able to buy?
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.
5. Assume Mark's utility function is given by u(x1, x2) = x1x2. The prices of goods 1 and 2 are p₁ and p2, respectively, and his income is m. (a) Find the optimal levels of consumption for goods 1 and 2. (b) Assume the government imposes a per unit tax t on good 1. Find his new consumption bundle. (c) Now assume the government imposes an income tax of tion bundle. tm 2(p₁+t)* Find his new consump-

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