The tables below describe the labor market in LowTaxLand and the economy\'s prod

Question

The tables below describe the labor market in LowTaxLand and the economy's production function. Use the tables to work questions (a) to (d). a. Draw the labor market graph below. Suppose LowTaxLand introduces an income tax of $1 per hour worked. Show this in your labor market graph in part (a). What are the levels of employment and potential GDP in LowTaxLand, what is the real wage rate paid by employers, and what is the after-tax real wage rate received by workers? c. Now if LowTaxLand eliminates its income tax, what then are the levels of employment and potential GDP and what is the real wage rate in LowTaxLand? d. Now assume that LowTaxLand doubles its income tax to $2 an hour. Show the impact of this in your labor market graph in (a). What are the levels of employment and potential GDP now? What is the real wage rate paid by employers and the after-tax real wage rate received by workers? e. Based on your answers, what have you learned from this homework regarding the supply side effects of expansionary fiscal policy?

Explanation / Answer

The labour demand curve will be same as it is and labour supply curve will shift upwards by $1 such that quantity supplied will be like

Wage Rate    quantity supplied

$10 0

$10.5 3

$11 6

$11.5 9

$12 12

$12.5 15

$13 18

$13.5 21

So, the new employnment = 9  as could be found from diagram by intersection of Labour Demand and supply

and corresponding to that new GDP 12

Real wage paid by employer = $11.50 as could be found from diagram by intersection of Labour Demand and supply

After tax real wage recieved by worker = $11.50 - 1 = $10.50

If you don't understand anything , then comment , I will revert back on the same.

And if you liked the answer then please do review the same. Thanks :)

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.