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

Kiara Wilson · Accepted Answer

Final Answer : B, Explanation :  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.

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