Question
Mary maximizes U=F (C, L), by choosing H, where C=wH+I and L=L*- H. I is a nonearned income available to Mary; L* is total time
Mary maximizes U=F (C, L), by choosing H, where C=wH+I and L=L*- H. I is a nonearned income available to Mary; L* is total time available to Mary (247=168 hours a week); H is hours Mary spent working; w is Mary's wage rate per hour. Construct Mary's budget constraint and plot it on the graph. Show all your steps, label the graph properly and identify the slope. Now, consider the effect on Mary's budget constraint of the government's putting a proportional tax on her earnings of amount , where 0<<1. Construct Mary's new budget constraint and plot it on the same graph. Show all your steps, label the graph properly, identify the new slope, and descried the effect of the tax on Mary's consumption and leisure. How do you think the change in can affect Mary's decision to work? Explain.
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