First suppose that there is no tax in the country Randland. A resident, Dagny, has an hourly wage of $50.
a) Graph the labor supply decision for Dagny on a daily income-leisure graph. Let the number of hours to be divided between labor and leisure be 16. Be sure to label the axes, the intercepts and the slope. Draw her indifference curve such that she works 12 hours a day.
b) Now, suppose that a new leader takes over Randland and he implements the following income tax (with respect to daily income for consistency):
Bracket A) $200 or less: tA = 0 %
Bracket B) more than $200: tB = 25 %
Again, use a daily income-leisure graph to graph the labor supply decision for Dagny, but include both her before and after tax budget constraints (label axes, intercepts and slope). Draw her new indifference curve such that she now works 14 hours a day.
c) How is it possible for Dagny to increase her hours worked after a tax?
d) If Dagny is working 14 hours a day at a wage of $50 per hour, how much does she pay in taxes (daily)? What is her average daily tax rate?