Question

2. (7 marks) Suppose that in a labour market the labour supply curve is inelastic (that is, a vertical straight line) and the government passes a legislation requiring the employers to pay a fixed amount of hourly benefit to each worker. Who will bear the economic burden of the cost of providing the benefit? Why? perfectly 3. (7 marks) "The greater the price elasticity of output demand the greater will be the likelihood of gross complementarity between labour and capital". Do you agree. Justify your position.

Answer 1

2) when the supply is perfectly inelastic, it means that change in price has no effect on quantity supplied.

When government passes a legislation requiring employers to pay a fixed amount of hourly benefit to each worker, employees pay whole of the tax burden. Imposition of tax reduces the wage rate received by employees but because labor supply is perfectly inelastic, decrease in wage rate has no effect labor supplied, employers pass on the burden of tax on employees.