i preview File Edit View Go Tools Window Help >3 %\\ I1 86% . Wed4106 PM q o as E' Assignmentlpdf (page 2 of 4) . ' QSearch Consider an economy with two goods, consumption c and leisure l, 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 l = 24 h where h is the number of hours a day the consumer chooses to work. The price of consumption 1) 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 consumer 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 L hours of work can be represented by the utility function U(c, h) = c '11:15. located Items (a) What is this consumer's budget constraint? (b) Solve for the consumer's utility maximizing hours of work h*(w, 1 7', Y) and con- sumption 0* (w, 1 T,Y). (0) Suppose that w = $10, Y = $1 and 6 = 0.2. The government is debating whether to increase the labor income tax from T1 = 0.3 to 72 = 0.5. Draw a graph with hours of work on the x-axis and after-tax income (consumption) on the yaxis that indicates the additional excess burden (EB) from such a tax increase. (d) Suppose that w = $10 and Y = $1. Also, suppose that we know that the con- sumer's compensated elasticity of hours worked with respect to the netoftax rate, ch = $1? = 0.2. Using the EB formula derived in class (i) calculate the EB/R when 7' = 0.3, (ii) calculate the EB/R ratio when 7' = 0.5. (e) Is knowing the compensated elasticity of hour's worked with respect to the net-oftax rate sufcient (i.e. appropriate) for calculating EB? Explain why or why not