Budget line in consumption and leisure decision problem

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One of the policies was to put a tax on people who didn’t buy health insurance. That is, if their wage was w before and now they don’t buy insurance then they receive only a fraction of the previous wage, so (1 − t)w. Show how this affects the budget line in the consumption/leisure decision problem. Assuming that the substitution effect dominates, show how this affects labor supply in the labor market. Given the change in labor supply, show how the FE curve shifts. Label the resulting short-run and long-run general equilibrium points and explain how prices must change in order to get to the long-run equilibrium.

Reference no: EM131101696

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