Reference no: EM131195992
Suppose, as in the federal income tax code for the United States, that the representative consumer faces a wage income tax with a standard deduction.
That is, the representative consumer pays no tax on wage income for the first x units of real wage income, and then pays a proportional tax t on each unit of real wage income greater than x.
Therefore, the consumer's budget constraint is given by
C= w(h-l) + pi if w(h-l) is less than or equal to x, or
C= (l-t)w(h-1)+tx+pi if w(h-l) is greater than or equal to x.
where C is consumption, l is leisure, w is the wage, pi denotes dividends, and h is the total amount of time available.
Draw the consumer's budget constraint on the (l,C) plane.
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