When the tax on wage income rises, hours worked will increase if the _ effect is greater than the _____ effect.

When the tax on wage income rises, hours worked will increase if the ___________________ effect is greater than the _______________________ effect. Fill in the blanks and explain
intuitively each of these effects. Feel free to draw a diagram if you think it will help your
explanation. (10 points)

Solutions

Expert Solution

If the tax on wage income rises, hours worked will increase if the income effect is greater than the substitution effect(people will work more to earn more to compensate for the fall in disposable income as a result of rise in taxes and would reduce the number of leisure hours.

Answer-income effect,substitution effect.

Rahul Sunny answered 1 year ago

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