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You graduate from UT Austin and take a job as a research assistant with a wage of $25 per hour. Your job is extremely flexible: you can choose any number of hours from 0 to 2000 per year. Suppose there is an income tax of the following form:

/in /by

You graduate from UT Austin and take a job as a research assistant with a wage of $25 per hour. Your job is extremely flexible: you can choose any number of hours from 0 to 2000 per year.

Suppose there is an income tax of the following form:

Income up to $10,000: no tax

Income from $10,000 up: 20% tax rate

Draw a graph in [hours, consumption] space showing your opportunity set with and without the tax system. (10 points)

Say you choose to work 1500 hours per year. What is your marginal tax rate?   What is your average tax rate?   (10 points)

Suppose that the tax in the second bracket is increased to 28%.  What is the likely effect on the labor supply?  (5 points)

 
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