Labor Supply

Consider a consumer who chooses an amount of consumption c and leisure time h to maximize the utility function given by U(c, h) = c h subject to the constraint c = w(24 h), where w > 0 is the wage rate. 1

a). Suppose a 25% tax rate is imposed on the consumer's labor income. Find the consumer's demand functions.

b). Suppose a lump-sum tax of size 3w is imposed on the consumer. Find the consumer's demand functions.

c). From your answers to the above two parts, which of the two tax policies would you recommend to the government? Explain.