Assume that you can work up to 24 hours per day at a wage of $1 per hour (with the remaining hours for leisure) and you are subject to a tax of 50% on all income over $5 per day (the first $5 per day is untaxed). You elect to work 10 hours per day.
1. Show your budget constraint and your optimum point.
2. Assume that the tax law is changed so that all income is subject to a 25% tax. Show your new budget constraint. Label it.
3. Do you now work more or less than 10 hours? Does the government collect more or less tax revenue than before?
4. Which do you prefer: the old tax law or new one?