Consider a Worker Who Consumes a Composite Consumption Good (On

question 11

Essay

Consider a worker who consumes a composite consumption good (on the vertical axis) and leisure hours (on the horizontal axis).
a.Suppose the worker has 80 hours of leisure per week and can earn a wage of $50 per hour.Illustrate the worker's weekly budget constraint.
b.In order to close the deficit, the government introduces a broad-based consumption tax on all consumer goods -- raising the price of the consumption good by 20%.Illustrate the new budget constraint faced by our worker.
c.On your graph, indicate the level of tax revenue raised by this broad-based consumption tax.
d.Using your graph, discuss why this tax is inefficient.
e.In this model is there any difference between the consumption tax and a wage tax? What is different about the real world that would change your conclusion about this?

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Definitions:

Standard of Care

A level of competence, diligence, and care that is expected of a professional or individual in a specific situation or industry.

Bailee's Right

The rights afforded to a person (the bailee) who temporarily possesses the personal property of another (the bailor), often including the right to use the property under agreed conditions.

Ski Storage

A specific area or facility designed for the purpose of safely storing skis when they are not in use, often found at ski resorts or lodges.

Bailment Completed

The conclusion of a bailment arrangement, where personal property temporarily entrusted to another is returned to its owner or legally disposed of.