proportional income tax on the representative consumer’s wage income
economics
Description
Assignment 1
Due: September 25, 2017 (In class)
Question 1 (30 marks)
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 where t is the tax rate. What effect does the income tax
have on consumption and labour supply? Explain your results in terms of income
and substitution effects. (7 marks)
b)
Show that the consumer is better off with a lump
sum tax than with a proportional tax as wage income (as in part a) given that
either tax yields the same revenue for the government. Show this using a
diagram and words.
(6
marks)
c)
Suppose that the firm has a minimum quantity of
employment, that is the firm can produce no output unless the labour
input is greater than or equal to Otherwise the firm produces output according to Given these circumstances determine the increase of the
real wage on the quantity of labour the firm demands. (7 marks)
d)
Derive the firm’s (from part c) demand curve for
labour and explain what it represents. (3
marks)
e)
What are three reasons for a competitive
equilibrium not being Pareto optimal? What two questions arise from these inefficiencies?
(7 marks)
