12. (This problem is challenging.) Suppose that an individual owed no taxes on the first $10,000 she earned and 15 percent of any income she earned over $10,000.

(This is a simplified version of the actual U.S. income tax.) Now suppose that Congress is considering two ways to reduce the tax burden: a reduction in the tax rate and an increase in the amount on which no tax is owed.

a. What effect would a reduction in the tax rate have on the individual’s labor supply if she earned

$30,000 to start? Explain in words using the income and substitution effects. You do not need to use a diagram.

b. What effect would an increase in the amount on which no tax is owed have on the individual’s labor supply? Again, explain in words using the income and substitution effects.