Assume that both income (Y ) and leisure (L) are normal goods for Raj, and his hourly
wage rate is W. Raj has no non-labour income. He faces the following income tax
structure: he pays no income tax if his income is ≤ Y1, he faces a tax rate of 10%
(t1 = 0.1) on his income if his income is in the range Y1 < Y ≤ Y2, and a rate of 20%
(t2 = 0.2) if his income is above Y2. Write down Raj’s budget constraint and draw a
graph depicting his budget constraint. Label clearly.