The representative consumers wage income

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Consider a representative consumer whose preferences are represented by the utility function, where c is consumption and I is leisure. The consumer derives income from wages w and dividend income a. Suppose that the government imposes a proportional income tax on the representative consumer's wage income. That is, the consumer's wage income is U (c, l) w(1-t)(h - I), where t is the tax rate, and h is the total amount of time available. What effect does the income tax have on consumption and labor supply? (A graphical argument is sufficient.) Explain your result in terms of income and substitution effects.

Reference no: EM131242375

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