Use the following labor market data to determine the answers for questions a, b
ID: 1236454 • Letter: U
Question
Use the following labor market data to determine the answers for questions a, b and c.
Wage Rate
Quantity Demanded
Quantity Supplied
Tax per hour
$30
14
22
$10
24
18
22
8
18
22
22
6
12
26
22
4
6
30
22
2
a. Is this tax progressive? Explain.
b. What is the before-tax equilibrium wage rate?
c. What effect does the tax have on the number of hours of work supplied and the market wage rate?
Wage Rate
Quantity Demanded
Quantity Supplied
Tax per hour
$30
14
22
$10
24
18
22
8
18
22
22
6
12
26
22
4
6
30
22
2
Explanation / Answer
a. Is this tax progressive? Explain.
Let's calculate the tax RATE:
$30 taxed at $10 = 33% tax rate
$24 taxed at $8 = 33% tax rate
$18 taxed at $6 = 33% tax rate
$12 taxed at $4 = 33% tax rate
$6 taxed at $2 = 33% tax rate
No, the tax is a flat tax - NOT a progressive tax.
b. What is the before-tax equilibrium wage rate?
Where QD = QS, $18.
c. What effect does the tax have on the number of hours of work supplied and the market wage rate?
Since the tax is effective PER HOUR, it decreases the per hour wage and hence the number of hours that a laborer is willing to work.
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