Consider the labor supply decisions of workers. Assume that the Congress enacts
ID: 1136542 • Letter: C
Question
Consider the labor supply decisions of workers. Assume that the Congress enacts a large personal income tax cut that effectively increases the wages of workers nationally.
A. Explain the income effect that would occur as a result of the tax cut.
B. Explain the substitution effect that the tax cut would create.
C. Relying on your answers from parts A and B, would you expect workers to offer more hours of labor in response to the tax cut or less (everything else remaining the same in the economy)? Explain your answer.
Explanation / Answer
A. Due to income tax cutoff, the income of labours increases. Now they can purchase more with the income which they are getting.
B. Due to income tax cut and rise in wages of labour there will be no change in substitution effect as now the labour can buy what he is wiiling to buy for himself or for his family.
C. I think now labour can give more working hours because there is now a sense of making money. They can earn more by working more.