Using flat income tax rates of 15% and 30%: Bob is deciding how many hours he needs to work each month. Before tax, he earns $15 per hour, for a maximum of 200 hours per month.

a, Sketch a graph for two monthly budget constraints that reflect the two different tax rates. Ensure consumption is on the y-axis and leisure is on the x-axis.

b, Redraw the graph from (a) to include indifference curves that shows Bob works less hours when the tax rate is 30% compared to when the tax rate is 15%.

c, Noting the difference in Bob's labor supply across the tax rates, is it true that:

(1) the substitution effect must dominate, OR

(2) the income effect must dominate

Explain your reason for choosing (1) or (2).

d, Explain how the substitution and income effects on demand for leisure hours led to Bob being able to work fewer hours at the higher tax rate.