1 Assume U

(c, 1 − L) = c − L2.

(a) Find revenues as a function of the income tax rate τ (the so called “Laffer curve”).

(b) Find the tax rate that maximizes revenues.

(c) What is the maximumamount of expenditures g that can be financed in this economy?

(d) Assume that g = 1/16. What is the optimal tax rate?

(e) Compare the welfare of the consumer under

(d) to the case in which the government expenditure is financed by a lump sum tax of 1/16 units.