Question

7. LO 2, 4 Suppose that a consumer can earn a higher wage rate for working overtime. That is, for the first q hours the consumer works; he or she receives a real wage rate of W1, and for hours worked more than q he or she receives W2, where W2 W1- Suppose that the consumer pays no taxes and receives no nonwage income; and he or she is free to choose hours of work: Draw the consumer's budget constraint; and show his or her optimal choice of consumption and leisure_ b. Show that the consumer would never work q hours_ anything very close to q hours Explain the intuition behind this_ Determine what happens if the overtime wage rate W2 increases. Explain your results in terms of income and substitution effects. You must consider the case of a worker who initially works overtime, and a worker who initially does not work overtime_ 8. LO 4 Show that the consumer is better off with a lump-sum tax rather than a proportional tax on wage income (as in question 3) given that either tax yields the same revenue for the government: You must use a diagram to show this. Hint: The consumption bundle the consumer chooses under the proportional tax must be just affordable given the lump-sum tax )

          7. LO 2, 4 Suppose that a consumer can earn a higher wage rate for working overtime. That is, for the first q hours the consumer works; he or she receives a real wage rate of W1, and for hours worked more than q he or she receives W2, where W2 W1- Suppose that the consumer pays no taxes and receives no nonwage income; and he or she is free to choose hours of work: Draw the consumer's budget constraint; and show his or her optimal choice of consumption and leisure_ b. Show that the consumer would never work q hours_ anything very close to q hours Explain the intuition behind this_ Determine what happens if the overtime wage rate W2 increases. Explain your results in terms of income and substitution effects. You must consider the case of a worker who initially works overtime, and a worker who initially does not work overtime_
8. LO 4 Show that the consumer is better off with a lump-sum tax rather than a proportional tax on wage income (as in question 3) given that either tax yields the same revenue for the government: You must use a diagram to show this. Hint: The consumption bundle the consumer chooses under the proportional tax must be just affordable given the lump-sum tax )

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