Dr.Johnson receives a lump sum payment of $100 per week.Suppose that the first $100 per week of labor income is untaxed but all labor income above $100 is taxed at a rate of 40%.

A) Dr.Johnson's budget line has a kink in it at the point where he takes 70 units of leisure.
B) Dr.Johnson's budget line has no kinks in the part of it that corresponds to a positive labor supply.
C) Dr.Johnson's budget line has slope 23 everywhere.
D) Dr.Johnson's budget line has a kink where his income is $200 and his leisure is 60 units.
E) Dr.Johnson's budget line has a piece that is a horizontal straight line.

Question

Gabriela Ramcharan · Accepted Answer

Final Answer : D, Explanation :  Since Dr. Johnson's labor income is taxed at a rate of 40% above $100 per week, his budget line will have a kink at the point where his income is $200 (which is above $100) and his leisure is 60 units. Below this point, his budget line will have a slope of -1 (since each additional unit of leisure means one less unit of income), while above this point the slope will be -0.6 (since each additional unit of leisure means only 60 cents less in income). This creates a kink in the budget line.

Definitions

Learning Objectives

Learning Objectives

Related questions