Jenny values the consumption, C, that she can enjoy from her income. She also values her free (non-work) time. Jenny is offered and accepts a job that pays a wage of $12 per hour and that allows her to choose her hours. Jenny also has a generous aunt who sends her $10 per day.

a. Write and explain the equation for Jennys daily budget constraint in terms of her possible consumption and her possible hours of work at the job. (5 points)

b. Graph Jennys feasible set of daily consumption and free time outcomes. Clearly label and explain all parts of the graph including what is on the horizontal axis, what is on the vertical axis, the amount of consumption Jenny can enjoy if she works zero hours, the amount of consumption she can enjoy if she works 24 hours, and the slope of the feasible frontier. (7 points)

c. Describe how Jenny will decide how many to work at the jobthat is, how does she make her decision. Redraw the graph from 1.b and use the new graph to show how she makes her choice and clearly indicate her choices of consumption and free time. Write an equation that describes how her work hours are related to her free time. Describe her choices referring to the graph and equation. (10 points)

Suppose that the state that Jenny lives in imposes a 10 percent tax on all income (earned and unearned).

d. Write and explain the equation for Jennys daily budget constraint in terms of her possible consumption and her possible hours of work at the job under the new tax policy. (5 points)

e. Redraw the (no tax) graph from 1.b, and graph Jennys new feasible set of daily consumption and free time outcomesthat is, show the feasible sets with and without the tax. Clearly label and explain all parts of the graph including what is on the horizontal axis, what is on the vertical axis, the amount of consumption she can enjoy if she works zero hours, the amount of consumption she can enjoy if she works 24 hours, and the slope of the feasible frontier. (8 points)

f. Redraw the graph of the feasible sets from 1.e. Add Jennys initial (no-tax) choice of consumption and free time from 1.c, and label this choice as A. Show and explain Jennys new choice of consumption and free time after the tax is imposed, and label this choice as B. Describe how Jennys consumption, free time, and market work change after the tax is imposedthat is, explain the differences between choice A and choice B. (10 points)

g. Redraw the graph from 1.f. Graph and explain the income, substitution, and net effects that are created by the imposition of the tax. Be sure to explain the relative sizes of the income and substitution effects and how they led to the net effect from 1.f. (15 points)

h. Suppose that instead of taxing all income, the state only taxed earned income. How would Jennys labor supply choice differ from choice Bwould it be higher or lower than the amount from choice B. Carefully and fully explain your answer. (10 points)