Question
Lynn is currently working as an independent dentist and earns about $150 per hour. Her average income tax rate is 30%. She is able to
Lynn is currently working as an independent dentist and earns about $150 per hour. Her average income tax rate is 30%. She is able to choose her hours. She now works from 9am-12 noon and then from 1pm - 5pm 5 days a week (Monday to Friday) out of an 80- hour week. Her weekly non-market income is $1,000.
a) Using our income leisure trade-off diagram, illustrate Lynn's preferences and her weekly income
b) The Minister of Finance decides to raise income taxes on upper income individuals. Lynn now faces an effective average income tax rate of 40%. Using the same diagram that you produced above, illustrate and explain how Lynn might react to this increase in taxes.
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