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1. Assume you can work as many hours per day as you wish at $20 per hour, after tax. You have no other income. You

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1. Assume you can work as many hours per day as you wish at $20 per hour, after tax. You have no other income. You have no ability to borrow or lend. a) Show how this information can be used to illustrate a feasible set, showing the choice between leisure time per day on the x-axis, and general consumption on the y-axis. Label the axes and intercepts. Draw some indifferences curves and show where the optimal point would be. (4 marks) b) Now a new tax is imposed, which means that your pay after tax is only $15 per hour. Draw the new feasible set on your diagram, and find a new optimum. Explain what has happened, and make clear whether working hours have increased or decreased, and why workers made this choice. (4 marks) c) The opposition party criticises the government for this tax rise, saying that it will definitely decrease the labour force's work hours. Comment on this argument. (4 marks)

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