Consider a standard consumption-leisure choice model where the worker supplies labor by reducing leisure in order to buy consumption goods. If employed income consists only of labor earnings. If unemployed, the worker receives unemployment benefits. There is a simple proportional tax on labor income. Suppose the tax rate on labor income is increased. Framing the discussion in terms labor income. Suppose the tax rate on labor income is increased. Framing the discussion in terms od income and substitution effects, discuss the labor supply response in the following two cases,
1. A Worker who prior to the tax rate change is supplying a strictly positive amount of labor.
2. A worker who prior to the tax rate change is unemployed.
