A. Budget line 1: Larry is paid $20 per hour. All income is tax free. Labor-Leisure Cobb-Douglas Utility = CR Draw the full labor-leisure diagram with the budget line, and solve Larry's point of optimization.

B. Budget line 2: Draw a new budget line to the following specifications: Larry is paid $30 per hour. The first $300 earned is tax free. The second $300 earned pays a 20 percent tax. Any additional earnings (above $600 gross) pay 40 percent tax. Include both the number of hours and net pay received at end points and at each bend point on budget line 2.

C. Is Larry better off on budget line 1 or on budget line 2? Explain how you know.