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Distinction between substitution and income effects

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Reference no: EM131065196

Suppose there is a increase in payroll taxes, which does not lead to a decrease in hours worked. A friend says that the tax "generates no excess burden because it does not lead to changes in behaviour." Is this statement true or false? Explain using a simple labour-leisure choice model, and do not forget to make the distinction between substitution and income effects.

Reference no: EM131065196

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