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Suppose a Tax Is Levied on Muhammad Which Reduces His

Question 24

Multiple Choice

Suppose a tax is levied on Muhammad which reduces his real income.The money collected is used to provide a public good which restores his utility to exactly the same level it had been prior to the tax.Compared to his original work effort,Muhammad will now work:


A) more hours because the substitution and income effects reinforce one another
B) fewer hours because the income effect of the public good exactly offsets the income effect of the tax,leaving only the substitution effect of the lower net wage
C) more hours because the income effect of the public good exactly offsets the income effect of the tax,leaving only the substitution effect of the lower net wage
D) either more or fewer hours,depending on the relative strengths of the income and substitution effects

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