Final answer:
To graphically show the pure income effect due to increased taxes, the budget constraint shifts to the left, indicating less income to spend on consumption and leisure. The consumer's optimal choice changes, now lying on a lower indifference curve, reflecting reduced utility due to the increased tax burden.
Step-by-step explanation:
The student's question deals with the graphical representation of the pure income effect on a consumer's budget constraint and optimal choice in the context of a labor-leisure model. We start by considering a rational consumer with a utility function represented by U(C,l), where C is consumption and l is leisure, facing a budget constraint C=w(h−l)+π−T, with w as the wage rate, h as total hours available, and π−T as non-labor income minus taxes. With an increase in taxes from T to 2T, while the wage rate w remains the same, the consumer's budget constraint shifts to the left from the initial position, as π−2T is smaller than π−T, assuming π−2T>0.
The slider move towards left represents the decrease in income, shown graphically by a parallel shift of the budget line inward, signifying that the consumer can now afford less consumption and leisure due to the higher tax T. Graphically, the optimal choice will now touch a lower indifference curve, indicating a loss in utility or 'buying power' due to the increased tax burden. The shift from the initial optimal choice to the new one after tax increase represents the income effect, where the consumer adjusts their consumption and leisure in response to the change in disposable income.