1. A person can choose to work any amount from 0 to 24 hours per day at a wage of $20
per hour.
a. Draw her daily budget constraint, representing total consumption versus hours of
leisure. (2 points)
For each of the scenarios below, indicate whether the proposed change will increase
or decrease the number of hours that this person will work, or if the effect is
uncertain. Justify your answer by stating whether the change in the budget constraint
leads to an income effect, a substitution effect, or both, and draw the new budget
constraint. (2 points each)
b. The government imposes a flat wage tax of 25 percent.
c. The government imposes a progressive tax in which a person’s first $200 of
income is not taxed at all and any income they earn above $200 is taxed at a rate
of 40 percent.
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d. The government implements a welfare program in which the welfare system pays
$100 per day to people with no labor market earnings, but benefits are reduced by
$1 for each $1 in labor market earnings that a person receives (so that people who
earn over $100 per day do not receive any welfare benefits).
e. The government implements a welfare program in which the welfare system pays
$100 per day to people with no labor market earnings, but benefits are reduced by