Question

Please show work and explain

EXERCISE 2 A consumer consumes one consumption good x and hours of leisure h. The price of the consumption good is 1. The consumer earns wage rate s per hour for the first eight hours of work, and s' > s for additional overtime hours. He also faces a tax rate per dollar on labor income earned above amount M. Draw the budget set. Assume M < 8s, which means that the consumer does not need to work for more than eight hours to earn labor income of amount M.

Answer 1

Aus: The slope of the budget set equals the wage rate. The wage rate depends on whether the workers is earning an income higher (or) lower than M. It also depends on whether the worker has already worked 8 hours . These are three cases . case 1:- When income of Mis reached by working 8 hours The budget set in this case will look as follows: Consumption (ov) 4 income I when income of M is reached by working 8 hours 8 S+165(1-t) slope -s' (1-t) 85 E--- Slopers o 16 24 Leisure case 2:- When income of M is reached by working more than 8 hours - The budget set in this case will look as follows: Scanned with CamScanner

Consumption (ov) income When income of Mis reached by working more than 8 hours. Slope=s62 - t) slopes XS -- - - - - - slopes 16 24 84 Leisure income of M is reached by working less than case 3 - When 8 hours consumption cor) income When income of Mis reached by working less than 8 hours slope = s(1-7) slope = 5 (1-) ML- - - - slopers 16 Leisure Scanned with CamScanner