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Unformatted text preview: any assets, and therefore he has no other income. (a) Write down Wallaces budget constraint. Graphically show Wallaces optimal choice of work and leisure. (b) Now suppose that the government imposes a wage tax of t. But the government does not want Wallace to be made worse off. Graphically show the amount of lump-sum subsidy needed in order to make Wallace as well off as before the wage tax. 3. Substitution and Income Effects If the market supply of labor is perfectly inelastic, indicate whether each of the following statement is true or false. Explain your answer. (a) The substitution effect of wage changes is zero. (b) The income effect of wage changes is zero. (c) The total effect of wage changes is zero. (d) The income effect of wage changes exactly offsets the substitution effect....
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- Spring '06
- J Liu