prob_set_06

# prob_set_06 - University of California, Davis Department of...

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University of California, Davis Department of Economics ECONOMICS 131 Spring 2008 L. Jay Helms Problem Set #6: The Effects of Income Taxes 1. Taxation and Labor Supply a. In a diagram showing leisure per week and income per week, draw the budget set for George, an individual with wage rate w, when there is no income tax. b. Suppose that George would choose to earn \$400 per week if there were no negative or positive income tax. Illustrate his chosen point and the corresponding indifference curve. c. Now suppose there is a negative income tax system which provides a basic grant of \$100 per week. The grant is reduced by 25¢ for each dollar earned, until it is eliminated altogether. (There is no positive income tax.) Draw the budget set and indicate its slope. d. Now show George’s labor supply in the presence of this negative income tax system, and explain how you determined whether labor supply increased or decreased. 2.

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## This note was uploaded on 10/15/2009 for the course ECON 131 taught by Professor Staff during the Spring '08 term at UC Davis.

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prob_set_06 - University of California, Davis Department of...

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