Question
Tim has the ability to work up to 80 hours each week at a pre-tax wage of $20 per hour but faces a constant 20%
Tim has the ability to work up to 80 hours each week at a pre-tax wage of $20 per hour but faces a constant 20% payroll tax. Thus, Tim maximizes his utility by choosing a work week of 50 hours each week. The government imposes a negative income tax; everyone is given $300 each week and anyone can supplement their income further by working. In order to cover the negative income tax, the payroll tax rate will go up to 50%.
A) Draw Tim's original budget line and his budget line under the negative income tax.
B) Show that Tim would choose to work fewer hours if the negative income tax is adopted.
C) Will Tim's utility be greater under the negative income tax? Please explain.
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