Describe the substitution and income effect

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Consider your decision about how many hours to work. a. Draw your budget constraint assuming that you pay no taxes (and receive no subsidies) on your income. On the same diagram, draw another budget constraint assuming that you receive a 20 percent subsidy (that is, for every dollar you receive in labor market earnings, the government gives you 20 cents). This is a negative income tax, and is akin to several programs run at the state and federal levels to combat poverty. b. Show how the tax might lead to more hours of work, fewer hours, or the same number of hours. Explain. In your explanation (and using graphs), describe (and show) the substitution and income effect

Reference no: EM13743248

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