without further restrictions on preferences, an increase in the price of market goods has an
ambiguous effect on hours worked.
Hours of Leisure
2-3. Sally can work up to 3,120 hours each year (a busy social life and sleep take up the
remaining time). She earns a fixed hourly wage of $25. Sally owes a 10 percent payroll tax
on the first $40,000 of income. Above $40,000 of income, there is no payroll tax. Sally also
faces a progressive income tax rate. There is no income tax on the first $10,000 of income.
From $10,000 up to $60,000, the marginal income tax rate is 25 percent. Above $60,000, the
marginal income tax rate is 50 percent. Graph Sally’s budget line.
Sally’s budget line will have kinks at gross income levels of $10,000, $40,000, and $60,000. As
her wage is $25 per hour, these kinks occur after 400 hours, 1,600 hours, and 2,400 hours of work
respectively, or, similarly, at 2,720, 1,520, and 720 hours of leisure.