Suppose that the income tax law exempts income under $8000 from tax, taxes income between $8000 and $20 000 at a 25% rate, and taxes income greater than $20 000 at a 30% rate.
a. Find the average tax rate and the marginal tax rate for someone earning $16 000 and for someone earning $30 000.
b. The tax law is changed so that income of less than $6000 is untaxed, income from $6000 to $20 000 is taxed at 20%, and income of more than $20 000 continues to be taxed at 30%. Repeat part (a).
c. How will the tax law change in part (b) affect the labour supply of the person initially making $16 000? How will it affect the labour supply of the person making $30 000?