ECON401 Lecture 10: 401-taxandls-16s
7 Feb 2017
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Assume a person can choose her hours of work. Suppose w is the wage rate, p is the price of consumption, l is the time endowment, l is time spent at leisure, n l l is time at work, and c is consumption. With the proportional tax rate on earnings this becomes. W l + p c = w l. (1 t)w l + p c = (1 t)w l. To keep the calculations manageable and the numbers later in this note realistic" assume she has cobb-douglas preferences: With cd utility functions, and without t, we know. 0 < a < 1. l = a. V (w, p, w l) = aa (1 a)1 a (w ) a p (1 a)w l e (w, p, u ) = a a (1 a) (1 a) w ap 1 au. With t in place, replace every w by (1 t)w .
