3 Using Figure 5.2 as a starting point, separate the income and substitution effects of the tax...

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3 Using Figure 5.2 as a starting point, separate the income and substitution effects of the tax on income and leisure. Hint: The income effect is measured by drawing a line parallel to AB but tangent to a lower indifference curve. The combination chosen with this budget line represents the income effect. The further changes to the income/leisure combination represent the substitution effect. Label the size of each effect on your diagram.

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