Suppose Jack Earns $10 an Hour Which Is Subject to a Tax

Multiple Choice

Suppose Jack earns $10 an hour which is subject to a tax of 10 percent.If the government raises the tax rate to 50 percent,he will:

A) increase hours of work if the income effect of the change in wage is less than the substitution effect.
B) increase hours of work if the income effect of the change in wage is greater than the substitution effect.
C) reduce hours of work if the income effect of the change in wage rate exactly offsets the substitution effect.
D) reduce hours of work if the income and substitution effects operate in opposite directions.