Tom earns $20 per hour. He faces a uniform 20 percent tax rate on all earned income and pays $6 per hour in child-care expenses for each hour that he works. He receives $80 in child support payments (his only non-labor income) each week. There are 168 hours in the week.
a. What is Tom’s gross hourly wage?
b. What is Tom’s net-of-tax wage?
c. What is Tom’s after-tax and after-child care hourly pay?
d. Graph Tom’s weekly budget line, labeling axes, intercepts and slopes.
e. Now suppose that Tom is offered an overtime wage of $40 per hour for every hour in excess of 40 hours per week (all other parameters stay the same). Show how this changes the budget constraint.
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