R in EB/R represents the \"tax revenue\" generated for government patel:tum/u2/l

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R in EB/R represents the "tax revenue" generated for government

patel:tum/u2/le cöhtehty 86483/viewContent/1949116Wiew demand function i(P,U). 4 Excess burden [25 marks] Consider an economy with two goods, consumption representative consumer. Since there are 2 leisure hours are equal to l 24-h where h is the number of hours a day the consumer chooses to work. The price of consumption p is equal to 1 and the consumer's hourly wage is w. The consumer faces an ad-valorem tax on their earnings of r percent. The Y that does not depend on how many hours she works (e.g. an inheritance). The consumer's preferences over consumption and hours of work can be c and leisure 1, and a 4 hours in a day a consumer's daily consumer also receives some exogenous income represented by the utility function U(c,h) -ae - (a) What is this consumer's budget constraint? (b) Solve for the consumer's utility maximizing hours of work (w1 T,a, .Y) and consumption c"(to, l-t, ,Y). (c) Suppose that w $10, Y-81, -3 and -1. The government is debating whether to increase the labor income tax from0.3 to 72 0.5. Using Excel (or another program) or pen-and-paper, draw a graph with hours of work on the r-axis and after-tax income (consumption) on the y-axis that indicates the additional excess burden (EB) from such a tax increase. (d) Suppose that w-810, Y-$1, 3 and I. Also, suppose that we know that the consumer's compensated elasticity of hours worked with respect to the net-of-tax rate, th-AT, 0.1. Using the EB formula derived in lecture (i) calculate the EB/R when0.3, ii) caleulate the EB/R ratio when0.5. (e) Is knowing the compensated elasticity of hour's worked with respect to the net-of-tax rate sufficient (i.e. appropriate) for calculating EB? Explain why or why not. Bonus: Suppose instead that the consumer's utility function was U(c,h) min(ac, 3h). Would the EB from a unit excise tax be larger or smaller com- pared with the utility function considered earlier. Explain your answer in 3-4 sentences. Download

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