Suppose an individual's weekly labour supply is given by L = -10 + w, where L is labour supply in hours and w is the hourly after-tax wage. Assume that firms are willing to pay a before-tax wage of $40/hr.

(a)In the absence of taxation, how many hours per week will the individual work? What are weekly earnings? Illustrate the choice in a diagram. [4] (b)Suppose the government institutes a 25% tax on labour income. What is the after tax wage under this tax system? How many hours per week will the individual work? How much does the individual earn before- tax? Calculate and illustrate the direct burden (tax revenue) from the tax. Calculate and illustrate the indirect burden (deadweight loss) from the tax. [4] (c)Imagine that there are many different individuals with different labour supply curves, all of whom face the before-tax wage of $40. Do they all face the same marginal tax rate on labour income? What about the average tax rate on labour income? Is the tax regressive, proportional, or progressive? [Hint: Write out a tax function, taxes as a function of income, ie. T(Y).] [4] (d)Now suppose that the government changes the tax so that under the new system, the first $600 of labour income/week is tax free, but income above this level is subject to the 25% tax. What is the after-tax wage under this tax system? How many hours per week will the individual work? How much does the individual earn before-tax? Calculate and illustrate the direct burden (tax revenue) from the tax. Calculate and illustrate the indirect burden (deadweight loss) from the tax. [4] (e)As in part (c), imagine that there are many different individuals with different labour supply curves, all of whom face the before-tax wage of $40. Under the new system, do all face the same marginal tax rate on labour income? What about the average tax rate on labour income? Is the tax regressive, proportional, or progressive? [Hint: Think about the tax function for incomes above $600] [4]