4. Lump-sum versus wage taxes in labor marketsThe following graph shows Valerie's budget constraint for leisure and consumption goods before any taxes are imposed (BC1). The indifference curve IC1 lies tangent to BC1 at point X.Note: You can select any black point (plus symbol) to see its precise coordinates, and you can select any line to see its vertical intercept and slope.Suppose the government introduces a tax of $4.00 for each hour of labor. This is represented by the wage tax budget line (BC2) on the previous graph. Assuming Valerie divides all 100 hours between leisure and labor, she will choose to supply _________ hours of labor, which is the same as / less than/ more than the amount of labor she supplied in the absence of the tax. Now, suppose instead that the government decides to issue a lump sum tax that would make Valerie just as happy as she would be with the wage tax. This is represented by the lump sum tax budget line (BC3) on the previous graph. Now, again assuming that Valerie divides all 100 hours between leisure and labor, she will choose to supply ________ hours of labor under this policy. Given that the government could collect $_________ in revenue under the wage tax policy or $_______ in revenue under the lump-sum tax policy, the deadweight loss associated with the lump-sum/ wage tax is $_______. . .Measuring worker surplus off the compensated demand curve, you can see that, under the wage tax policy (Y), it is equal to regionC/RegionB/region B and A/ regions A B and C, and under the lump-sum tax policy (Z), it is equal to regionsA,B and C/ region C/ region B/region A/region B and A. Because you know that Valerie is equally happy under each policy, the lump-sum tax must be equal to the value of regionsA,B and C/ region C/ region B/region A/region B and A. Comparing the total revenue generated by the wage tax program to the revenue generated by the lump-sum tax, you can see that deadweight loss associated with the wage tax is given by regionsA,B and C/ region C/ region B/region A/region B and A. .

\f12 Uncomp. LS 10 8 A B WAGE (After-tax dollars per hour) 6 C 2 Comp. LS 0 0 10 20 30 40 60 70 80 90 100 LABOR (Hours per week)