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.
The labor-leisure tradeoff is based on a utility function that depends on two goods, consumption and leisure. This application analyzes two utility functions:
For either utility function, you can draw indifference curves and a budget constraint. Repeating this process for range of wage rates allows you to:
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
Overview of Micro Models
Overview of Macro Models