Now suppose that the government is considering two ways to reduce the tax burden: a reduction in

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Now suppose that the government 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 labour supply if she earned €30 000 to start with? 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 labour supply? Again, explain in words using the income and substitution effects.

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Economics

ISBN: 124344

2nd Edition

Authors: N. Gregory Mankiw

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