A person can choose to work any amount from 0 to 52 weeks per year at a wage of $1000 per week.
a. Draw her annual budget constraint, representing total annual consumption versus annual weeks of leisure.
For each of the scenarios below, indicate whether the proposed change will increase or decrease the number of weeks 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.
b. The government imposes a flat wage tax of 10 percent.
c. The government imposes a progressive tax in which a person’s first $20,000 of income is not taxed at all and any income they earn above $20,000 is taxed at a rate of 20 percent.
d. The government implements a welfare program in which the welfare system pays $5000 per year 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 $5000 per year do not receive any welfare benefits).
e. The government implements a welfare program in which the welfare system pays $5000 per year to people with no labor market earnings, but benefits are reduced by $0.50 for each $1 in labor market earnings that a person receives.