Suppose that you can work anywhere from 0 to 24 hours per day at a wage of $1 per hour. You are subject to a tax of 50% on all wages over $5 per day (the first $5 per day is untaxed). You elect to work 10 hours per day.
a. Show your budget constraint between labor and wages, and show your optimum point.
b. Suppose that the tax law is changed so that all wages are subject to a 25% tax. Do you now work more or less than 10 hours? Does the government collect more or less tax revenue than before?
c. Which do you prefer: the old tax law or the new one?