Economics Instead of a lump-sum tax we had in the textbook model, suppose the government imposes a proportional income tax at a rate t on the consumer’s wage income. That is, for a given market wage rate w, the effective wage rate the consumer faces would be w(1 − t). The rest of the model structure is the same as what you saw in class as well as in the textbook (except Question 3). 1. [5] Write down the consumer’s budget constraint under this tax policy. 2. [5] Describe the consumer’s budget constraint in a diagram. Label properly, and explain the key difference(s) in this case compared to the lump-sum tax case, if any. 3. Consider the consumption bundle where the consumer consumes h units of leisure on the budget constraint (at the upper right corner of the diagram you drew above). (a) [5] This point may or may not be the optimal consumption bundle depending on the consumer’s
