The government of the country of Burnination is trying to encourage its workers

Question

The government of the country of Burnination is trying to encourage its workers to work more. They first attempt an advertising campaign featuring Prime Minister Trogdor yelling at the camera and calling the viewers a bunch of lazy bums whose thatched-roof cottages should be burned to the ground. This fails miserably. Finance Minister Pom Pom suggests an alternative policy of reducing the income tax rate. What would you expect would be the most likely outcome of this policy? Choose the best answer.

1.Lower earning workers will work more, but higher earners will work less, because of a backward-bending supply curve for labor.

2.The workers will actually work less, because lower taxes will reduce the amount of utility they get from leisure.

3.The workers will work more, because the life-cycle theory of savings predicts that people work harder when taxes are low.

4.There will be no change in the workers' behavior, because a change in tax rate will not affect their labor-leisure budget constraint.

Explanation / Answer

Ans

1 A is right answer. Labour earning good income will get more income and will reduce labour supply as his cost of working I. E sacrifice of leisure increases in real terms.. Others will work more

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