Suppose that you can work anywhere from 0 to 24 hours per day at a wage of $1 pe

Question

Suppose that you can work anywhere from 0 to 24 hours per day at a wage of $1 per hour. You are subject to a tax of 50% on all income over $5 per day (the first $5 is untaxed). You elect to work 10 hours per day.

A) Show your budget constraint and your optimum point.

B) Suppose that the tax law is changed, so that all income is subject to a 25% tax.
Do you now work more or less than 10 hours? Does the government collect more or less revenue than before?

C) Which do you prefer: the old tax la or the new one?

Explanation / Answer

wd=wage per day
If hours >5 wd =hours +(hours -5) x 0.5
If hours <5 wd=hours
As 10 hours is chosen the first function is chosen
wd=10-2.5=7.5 $
Utility function is not shown, we have to know how work or leisure time is considered by this individual to maximize and get the optimum point.

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