Suppose the production function is = (200K − 4K)( − 0.0025) Where the productivity A=1, and capital stock K=10 And the marginal product of labor is P = 1600 − 8 The aggregate quantity of labor supplied is = 100 + + T, where w is the real wage rate and T is the lump-sum taxes that household paid to the government

Question 3: Which of the following statement correctly explains the effect of increasing tax payments on labor supply

A. Decreases household wealth and increases labor supply due to the income effect

B. Decreases household wealth and increases labor supply due to the substitution effect

C. Increases household wealth and decreases labor supply due to the income effect

D. Increases household wealth and decreases labor supply due to the substitution effect

E. None of the above