- Wage income below an is untaxed.1 0 Wage income above x1 but below x2 is taxable at the proportional rate r1 6 (0,1). - Wage income above x2 is taxable at the proportional rate r; E (0, 1). Assume that the wage income tax schedule is progressive, i.e., 72 > n. 1. Write down the consumer's budget constraint, assuming that dividend income (It, as de- noted in class) is untaxed. Him: The budget constraint should have three sections, depending on the level of wage income w(h l): (a) w(h l) 5 x1. (b) x1 .152. 2. Draw the consumer's budget constraint on the (I, C) plane. 3. Suppose that the government increases the tax rate on middleincome earners, i.e., 151. Using a diagram, show the effects of this change on the consumer's budget constraint. 4. Using a diagram, determine the effects of the increase in n on the optimal choices of topincome earners (those with wage income above 362) and of middleincome earners (those with wage income between x1 and x2). Explain your results in terms of income and substitution effects