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The above diagram depicts a consumer choice model for an individual worker. After a payroll tax is increased, the worker's budget constraint pivots. Before the
The above diagram depicts a consumer choice model for an individual worker. After a payroll tax is increased, the worker's budget constraint pivots. Before the tax hike, the budget constraint was BC1. After the tax hike, the budget constraint became BC2. Point A depicts the combination of consumption goods (C) and leisure hours (L) consumed before the tax hike. Point B shows the combination consumed after the tax hike. For this worker, which effect appears to be larger? The substitution effect or the income effect? Explain your reasoning. (4 points)
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