Yolanda receives a lump sum child support payment of $150 per week.She has 80 hours a week to divide between labor and leisure.She earns $5 an hour.The first $150 per week of her labor income is untaxed, but all labor income that she earns above $150 is taxed at the rate 30%.If we graph her budget line with leisure on the horizontal axis and consumption on the vertical axis, her budget line has
A)a kink in it at the point where she takes 60 units of leisure.
B)a kink in it where her income is $300 and her leisure is 50 units.
C)a slope of -3.50 everywhere.
D)no kinks in the part that corresponds to positive labor supply.
E)a piece that is a horizontal straight line.

Question

Quizplus · Accepted Answer

Yolanda's budget line is made up of two segments: one with a slope of -30/5=-6 (after taxes) and intercept of $150, and one with a slope of -5 (before taxes). The kink in the budget line occurs where the two segments intersect, which is where her total income (child support plus labor income) equals $300 per week. At this point, she has to decide whether to continue working and pay taxes, or to increase her leisure time. Therefore, option B is correct.

Yolanda Receives a Lump Sum Child Support Payment of $150