1. Suppose Morten has 100 hours available in the week and receives a wage of $20 per hour and $100 a week in nonlabor income. Morten faces a 20% proportional payroll tax (a tax that only applies to labor earnings) and currently chooses to work 40 hours per week (assume completely flexible hours).

a) Using the labor/leisure model, graph Mortens original equilibrium. Be specific about budget constraint intercepts and his initial income.

b) Suppose Mortens nonlabor income is increased to $250 a week while the govt. raises the payroll tax to 30%. Show (graphically) how this affects Mortens budget constraint and labor/leisure choice. Briefly explain (verbally is fine, but be sure to mention the substitution and income effects if any) the change in leisure and work hours if any.

c) Suppose the government passes a law requiring that employers pay a 25% premium for overtime work (more than 40 hours in a week). How do you think Morten will respond given the situation in part (a)? How about part (b)? A verbal answer is fine in both cases.