Assume that Agostino's hourly wage is $30 per hour, his rental property yields the $120 per day, and he has 16 hours in a day to allocate between leisure and work.
1. Illustrate his daily budget constraint. Discuss how much can Agostino consume if he enjoys 16 hours of leisure?
2. Assume that the government imposes a 20% income tax. Determine his budget constraint now? In the same diagram, using a dashed line, illustrate the new budget constraint.
3. Discuss what happens if the government sets the tax rate to zero on unearned income and on the first $120 of his earnings, but imposes a 20% tax for each dollar earned in excess of $120?