Dr.J has 80 hours per week to divide between work and leisure.His wage rate if $5 per hour.Dr.J receives a lump sum payment of $100 per week.Suppose that the first $50 per week of his labor income is untaxed, but all labor income above $50 is taxed at a rate of 70%.
A)Dr.J's budget line has a kink in it at the point where he takes 80 units of leisure.
B)Dr.J's budget line has a kink where his income is $150 and his leisure is 70 hours.
C)The slope of Dr.J's budget line is everywhere -1.50.
D)Dr.J's budget line has no kinks in the part of it that corresponds to a positive labor supply.
E)Dr.J's budget line has a piece that is a horizontal straight line.

Question

Quizplus · Accepted Answer

The kink in the budget line occurs where his labor income reaches $150 (50 untaxed + 100 lump sum payment) and he has 70 hours of leisure. This is because any additional labor income beyond this point will be taxed at a 70% rate, causing a decrease in disposable income and therefore affecting the budget constraint. The slope of the budget line is F1F1F1S1F1F1F101.50 for the portion with positive labor supply, but this does not account for the kinked portion. There is also a piece of the budget line that is a horizontal straight line at y = $50, representing the untaxed portion of his labor income.

DrJ Has 80 Hours Per Week to Divide Between Work