1. Evaluate the following statement: The more inelastic the supply of labor, the

Question

1. Evaluate the following statement: The more inelastic the supply of labor, the more likely it is that incidence of employers’ share of the payroll tax falls on workers.

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2. Explain the following statement: When a person’s wages increase, an income effect will mean that a person will likely work fewer hours. Show the income effect on a graph.

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3. Explain the following statement: When a person’s wages decrease, a substitution effect will induce a person to work fewer hours.Show the substitution effect on a graph.

Explanation / Answer

1. True

Explanation: The higher burden of the tax is borne by the relatively more inelastic side of the market. Inelastic labor supply means labor supply does not change much with changes in wage. Therefore, employers pass on the larger share of the payroll tax to the employees.

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