LO 1, 3, 4 Consider a situation in which lumpsum tax is higher than dividend income and the consumer prefers an equal proportion of consumption and leisure.

(a) Suppose that h = 16, w = 0.5, p = 0.6, and T = 4. Use a diagram to show the consumer’s optimal choice of consumption and leisure.

(b) If the consumer likes a ixed proportion of 4 units of consumption and 1 unit of leisure, how will your answer to part

(a) change?

Use the diagram from your answer to part

(a) to show the changes.

(c) Show the new optimal choice of consumption and leisure on the same diagram if w is now doubled. Explain this change in terms of income and substitution efects.