Indiana State University Microeconomic Foundations Question I have attached the question to this post. If you need anything clarified feel free to ask. 1.

Indiana State University Microeconomic Foundations Question I have attached the question to this post. If you need anything clarified feel free to ask. 1. [Question to Hand-In) Microeconomic foundations: Consider the neoclassical
model from lectures in which consumers decide about allocations of consumption
and leisure and firms decide how much labour to hire. Suppose that consumers are
subject to a proportional income tax (t) but no lump-sum taxes. Suppose also that
labour is the only input into production and that firms have a linear production
function given by Y = 2ND.
(a) What is a Pareto optimum and why does a proportional tax on labour income
lead to an inefficient economic outcome?
(b) Write down the firm’s profit function and the consumer’s budget constraint
when there is a proportional income tax but no lump-sum taxes.
(c) Show graphically how the labour supply and demand curves differ with and
without the proportional tax.

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