Tomoko receives a lump sum child support payment of $200 per week.She has 80 hours a week to divide between labor and leisure.She earns $5 an hour.The first $100 per week of her labor income is untaxed, but all labor income that she earns above $100 is taxed at the rate 50%.If we graph her budget line with leisure on the horizontal axis and consumption on the vertical axis, her budget line has
A)no kinks in the part that corresponds to positive labor supply.
B)a kink in it where her income is $300 and her leisure is 60 units.
C)a kink in it at the point where she takes 70 units of leisure.
D)a slope of -2.50 everywhere.
E)a piece that is a horizontal straight line.

Question

Quizplus · Accepted Answer

Her budget line is initially given by:
C = (200*hours of leisure) + (100 + 0.5*[5*(hours of labor - 20)])*hours of labor
Taking leisure on the horizontal axis and consumption on the vertical axis, the budget line would have a kink where her income is $300 and her leisure is 60 units. This is because at this point, her labor income would exceed $100 and would be subject to 50% tax, resulting in a lower consumption level. Therefore, the slope of the budget line would change at this point, creating a kink.

Tomoko Receives a Lump Sum Child Support Payment of $200