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Question 2 {30 points) Consider the following gure depicting the leism'econsumption tradeoff of a worker. Con srunption is annual measured in dollars, and leisure is

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Question 2 {30 points) Consider the following gure depicting the leism'econsumption tradeoff of a worker. Con srunption is annual measured in dollars, and leisure is annual measured in hours. Labor earnings are this worker's only source of income. Suppose there is an increase in the labor income tax rate from 20% to 3WD, as shown in the gure. @anH m which; (a) Which is the worker's aftertax consumpiionf leisure bundle, A, B, or C? (b) What is the size (in hours} of the substitution effect on labor supply of the tax increase? What about the income effect? Does this imply leisure is a normal or inferior good? Which of the substitution and income effects dominates, and what is the net effect on hours worked? (c) Suppose 'rat before the tax change, the worker worked 1,560 hours per year. With this in mind, please calculate the elasticity of this worker's labor supply, E, with respect to a change in the netoftax rate, 1 1', computed at the average of their netoftax rate and labor sup ply before and after the tax change. Please describe your answer in words. Be very careful about signsa change in the netoftax rate has the opposite sign to a change in the tax rate, and a change in labor supply has the opposite sign to a change in leisure. To assist, the

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