1 Excess Burden [25 marks] Consider an economy with two goods, consumption and leisure [, and a representative consumer. The consumer is endowed with 24 hours of time in a day. A consumer's daily leisure hours are equal to | = 24 h where h is the number of hours a day the consumer chooses to work. The price of consumption p is equal to 1 and the consumer's hourly wage is w. The consumer faces an ad valorem tax on their earnings of 7 percent. The con- sumer also receives some exogenous income Y that does not depend on how many hours she works (e.g. an inheritance). The consumer's preferences over consumption and hours of work can be represented by the utility function Ule,h) = ac %, where o > 0, 8 > 0 and p > 0 are parameters. (a) What is this consumer's budget constraint? [1 marks]| (b) Solve for the consumer's utility maximizing hours of work ~*(w,17) and consumption *(w,1 7,Y). [4 marks] (c) What is the uncompensated own-price elasticity for the supply of hours of work? [3 marks] (d) What is the relationship between the uncompensated own-price elasticity of labour supply and the compensated own-price elasticity of labour supply for an individual with the utility function given in this question? [2 marks]| For parts (e) - (g), assume the following: 7= 0.3, w = $80, Y = $55,000, o = 2, B =0.5 and p = 1.5. (e) Calculate the revenue generated by the income tax increase. [3 marks] (f) Using the excess burden formula, calculate the excess burden per dollar of revenue raised from this tax. [4 marks] (g) Now suppose that p = 2 (instead of p = 1.5). Re-calculate the excess burden from this tax. Is your answer different than in part (f)? Explain why or why not in 2-4 sentences. [4 marks]| (h) Suppose instead that the consumer's utility function was U(c, h) = min(c,h). Would the EB from a unit excise tax be larger or smaller compared with the original utility function. Explain your answer in 2-4 sentences. [4 marks]