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?

---

Definitions:

Accumulated Depreciation

The total amount of a tangible asset's cost that has been depreciated over the time it has been in use.

Productive Assets

Assets that contribute directly to the revenue-generating activities of a business.

Revaluation

An adjustment to the carrying value of an asset or a currency to reflect its current fair market value.

IFRS

International Financial Reporting Standards, a set of accounting standards developed by the International Accounting Standards Board (IASB) that guide financial reporting globally.