A worker earns £15 pounds an hour and chooses to work six hours a day. The worker has no other source of income. For the question below, assume that the worker has “standard” Cobb- Douglas preferences. When considering wage changes, assume that the “income effect” outweighs the “substitution effect”. (a) Write down the worker’s budget constraint and then represent the worker’s choice in a suitably labelled graph. (b) The government gives the worker £80, but taxes the worker’s wage, such that their take-home wage is £10. Model this policy in a suitably labelled graph. Is the worker better off (in terms of utility) after this policy? Note –there are a range of correct answers for the worker’s new hours/income. Choose one that is consistent with the information given in the question.
A worker earns £15 pounds an hour and chooses to work six hours a day. The worker has no
other source of income. For the question below, assume that the worker has “standard” Cobb-
Douglas preferences. When considering wage changes, assume that the “income effect”
outweighs the “substitution effect”.
(a) Write down the worker’s budget constraint and then represent the worker’s
choice in a suitably labelled graph.
(b) The government gives the worker £80, but taxes the worker’s wage, such that
their take-home wage is £10. Model this policy in a suitably labelled graph. Is
the worker better off (in terms of utility) after this policy? Note –there are a
range of correct answers for the worker’s new hours/income. Choose one that
is consistent with the information given in the question.
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