Contemporary Labor Economics 9th Edition by Campbell Mcconnell, Stanley Brue, David Macpherson, Robert Powell, David Colander

Exercise 5

Use a work leisure diagram that includes nonlabor income to portray an individual who is maximizing utility by working, say, eight hours per day. Now com­pare the labor supply effects of imposing (a) a lump-sum tax (a tax that is the same absolute amount at all levels of earned income); and (b) a proportional tax of, say, 30 percent on earned income. Do hours of work rise or fall in each case Can you generalize these outcomes to all individuals in the economy Explain.