Will a tax cut induce people to work more?

This issue can be addressed within the context of a model of labor supply. In particular, a model of utility maximizing agents facing what is known as the labor-leisure tradeoff is particularly appropriate. This EconModel application considers both a percentage income tax and a fixed dollar tax or rebate.

**Model Link:
Labor Supply,Income Taxes, and Transfer Payments**

<activate the model links>

Printable PDF Exercises

The labor-leisure tradeoff is based on a utility function that depends on two goods, consumption and leisure. This application analyzes two utility functions:

- Cobb-Douglas Utility
- "Real World" Utility

For either utility function, you can draw indifference curves and a budget constraint. Repeating this process for range of wage rates allows you to:

- Derive the Supply of Labor
- Analyze the Effects of Income Taxes
- Analyze the Effects of Transfer Payments

Under certain conditions, you obtain the famous Backward-Bending Labor Supply Curve that shows labor supplied decreasing as the wage rate increases.

**Classic
Economic Models**

**Microeconomics**

**Introduction**

Overview of Micro Models

**Supply and Demand**

Basic Supply and Demand

Who Pays a Sales Tax?

The Cobweb Model and

Inventory-Based Pricing

**Theory of the Firm**

Perfect Competition

Monopoly and

Monopolistic Competition

Price Discrimination

The Demand for Labor

**Theory of the Consumer**

Two Goods - Two Prices

Intertemporal Substitution

Labor Supply, Income Taxes,

and Transfer Payments

**Macroeconomics**

**Introduction**

Overview of Macro Models

**Models in Chronological Order**

The Classical Model

The Simple Keynesian Model

The Keynesian IS/LM Model

The Mundell-Fleming Model

Real Business Cycles

The IS/MP Model

The Solow Growth Model

**Financial Markets
**
Utility-Based Valuation of Risk

Mean-Variance Analysis:

Risk vs. Expected Return

Fixed Income Securities:

Mortgage/Bond Calculator

Growth Investments:

Present Value Calculator

**Resources**