A tax cut that raises the after-tax wage rate will most likely result in more hours worked if
A) tax rates were low already.
B) the relevant portion of the labor supply curve is upward sloping.
C) the relevant portion of the labor supply curve is downward sloping.
D) workers can be easily fooled.

Question

Quizplus · Accepted Answer

An upward sloping labor supply curve indicates that as the after-tax wage rate rises, workers are more willing to supply more labor hours. Therefore, a tax cut that increases after-tax wages will result in more hours worked as workers are incentivized to work more. However, if tax rates were already low and the after-tax wage rate was already high, then a further tax cut may not have as significant an impact on increasing hours worked.

A Tax Cut That Raises the After-Tax Wage Rate Will