An increase in the marginal tax rate will cause Group of answer choices a) neither an...
An increase in the marginal tax rate will cause
Group of answer choices
a) neither an income nor a substitution effect.
b) a pure substitution effect.
c) a reduction in the time available for both market labor and non-market activities.
d) a pure income effect.
e) both an income and a substitution effect.
Homework Answers
Ans.- (E)
Marginal tax rate is the rate of tax charged on each additional dollar of earned income.
If government increases marginal tax rate , then substitution effect makes leisure cheaper (because wage is low) so you choose more leisure. The income effect makes you buy less leisure ( The increase in marginal tax rates decreases your real income and therefore you demand less leisure). That is, you work less. So, both effects work in opposite direction.
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