Consider a worker who is paid a wage of $20 per hour. The worker has a disutilit
ID: 1246221 • Letter: C
Question
Consider a worker who is paid a wage of $20 per hour. The worker has a disutility h^2 of working h hours. Assume that the worker faces a tax rate t. Thus, his net (after-tax wage rate is $20 (1 - t)). (i) How many hours will the worker work if his objective is to maximize net income minus disutility of work, i.e., he wants to maximize 20(1-t)h-h^2. (ii) Given your answer to part (i), what is the total tax revenue from a tax rate of t? (iii) Suppose that the initial tax rate is t1 = 0:7. Consider a tax reform that reduces t to t2 = 0:6. What is the change in revenue following the change from t1 to t2?Explanation / Answer
Worker's wage = $20 per hour.
Net income = $20(1-t) t is the tax
disutility is h hours.
Worker needs to work for 8 hours per day to maximize his net income - disutility of work.
Tax revenue will be $20t
The change in revenue will be clear only when the worker starts spending more time on work.