Labor Supply Theoretical considerations How do taxes affect the work decision? In Figure 16.2, tax reduces wage rate From Sw to $(1-t)w, because person only cares about part of wage he gets to keep ax reduces the opportunity cost of another hour of leisure Budget constraint rotates from TD to TH6 Labor Supply: Theoretical Considerations • How do taxes affect the work decision? • In Figure 16.2, tax reduces wage rate – From $w to $(1-t)w, because person only cares about part of wage he gets to keep – Tax reduces the opportunity cost of another hour of leisure • Budget constraint rotates from TD to TH