Reference no: EM133359344

Professor John is paid a wage of $50 per hour. His maximum amount of time available for each week is 60 hours. Under the current income tax system, Professor John pays no taxes on the first $150 he earns per week, and after that pays 40% of his income in tax. Under this tax, Professor John chose to work 50 hours each week. For the following questions, please put all the lines and numbers in ONE diagram.

1. Draw his before-tax budget constraint, after-tax budget constraint, and mark his optimal labor-leisure choice on the diagram. How much leisure that John enjoyed? How much pre-tax income that he made? How much after-tax income that he made? and how much tax that he paid?

2. The government announces a new stimulus plan that will increase the amount that can be earned without tax to $250 per week. Under this tax system, Professor John now chose to work 40 hours. Please add his new after-tax budget constraint and new optimal labor choice on the diagram. Now, how much leisure that John enjoyed? How much pre-tax income that he made? How much after-tax income that he made? and how much tax that he paid?