Consider greg decision of how much to work

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Question 1), Consider Greg's decision of how much to work. He initially makes $10 per hour and can potentially devote up to 16 hours a day to work or leisure. His budget constraint is given by y = wh + N.

a), Suppose Greg has no non-labor income. Construct a graph of Greg's budget constraint. Be sure to label the intercepts on the x and y axes.

b), Now suppose his nonlabor income increases from 0 to $40. How does this change your graph? Be specific. Will this change induce a substitution effect, income effect, neither effect nor both effects?

c), He now has $40 of nonlabor income. Suppose the federal government puts a 20 percent tax on his wage earnings. How does this introduction of the tax change your graph? Will this induce a substitution effect, income effect, neither effect nor both effects?

d), He has $40 of nonlabor income. Suppose is wages increase to $12 per hour but now the federal government decides a 10 percent tax on his wage earnings up to $100 of pretax earnings and 25 percent on everything earned out. How does the introduction of these tax brackets change your graph? Will this induce a substitution effect, income effect, neither effect nor both effects

Question 2) The Earned Income Tax Credit (EITC) is a government program for low and moderate-income families with working adults. It provides a tax credit to households that have earnings greater than 0 as a percentage of earnings up to a predetermined threshold. Is this program to help poor people with social insurance? Why or why not? Explain

Question 3) Explain briefly why the theory suggests that, in general, the government shouldn't place taxes in markets that have pre-existing distortions. Be specific. Give an example where taxes can improve the distortion.

Reference no: EM133336633

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