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Question: consider a representative consumer whose preferences are represented by the...

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Consider a representative consumer whose preferences are represented by the utility function U(C, L), where C is consumption and L is leisure. The consumer derives income from wages w and dividend income V. Suppose that the government imposes a proportional income tax on the representative consumers wage income. That is, the consumers wage income is w(1 - t)h where t is the tax rate, and h is the total amount of time devoted to work. What effect does the income tax have on consumption and labor supply? Explain your result in terms of income and substitution effects. (A graphical argument is sufficient.) a)

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