Question

Suppose Tom has a utility function U=C*L C= consumption L= hours of leisure Tom has 100 hours to divide between work and leisure per week wage is $20/hr

1. Write down budget constraint in terms of consumption and hours of work

2.Tom make decisions on hours of work, leisure and consumption to max. utility. Explain why we can collapse this problem to one in which he chooses hours of leisure only 3. Find optimal hours of work and total consumption for Tom

4. Suppose that the gov't now implements a flat tax of 10% on all income earned what would be Tom's a) optimal hrs of work b) before tax income c) after tax income d) tax revenue collected e) consumption

5. Show in a labelled diagram how the tax affects budget constraint and toms optimal choices. Show and explain the income and substitution effects associated with the tax. 6. What would happen to Tom's budget constraint if he got overtime oat for any hr of work over 45 hrs per week. would you expect tom's hours of work to inc, dec or stay the same?

7. what would have to change in the assumptions to get a labour supply that sees a bigger change in hrs worked with a change in wages?

Answer 1