Suppose income tax rates are reduced.As a result,Smith works more hours per week while Jones works fewer hours per week.We can conclude that:

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The difference in behavior between Smith and Jones can be explained by the substitution and income effects. When income tax rates are reduced, individuals have the potential to earn more per hour worked, which can lead to two effects: the substitution effect, where individuals may work more because the relative price of leisure has increased (work is more rewarding), and the income effect, where individuals may work less because they need to work fewer hours to maintain the same income. Smith working more suggests the substitution effect dominates for him (he values the increased earnings from working more hours over leisure), while Jones working fewer hours suggests the income effect dominates for him (he values the increased leisure time more, as he can maintain his desired income level by working fewer hours).

Suppose Income Tax Rates Are Reduced