Explain your result using wealth and substitution effects

Reference no: EM13188759

Assume that the government introduces a proportional labour income tax, t,. The consumerís after tax wage is now (1 t)w. Explain the e§ect of the new tax on the consumerís consumption and hours of work. In your answer, provide a graphical analysis illustrating the consumerís optimal choice of consumption and leisure before and after the labour income tax. Explain your result using wealth (income) and substitution effects.

Reference no: EM13188759

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