Question

Q13 In a simple labor market model with perfect competition. 1. Draw a supply and demand, and label the axis appropriately. What is a the price in this setting? What is the quantity? Who are the sellers? Who are the buyers? 2. The government wants to increase revenue, and decides to implement a tax on the labor market. Draw the effect of two taxes: one payed by workers and another payed by firms. Compare them. 3. Explain what are the key factors behind the economic incidence of the tax. Speculate who might be facing the largest burden. 4. Re-draw the previous diagram, but now assume a highly inelastic labor supply. Compare a the producer surplus before and after the tax. 5. Identify the death-weight loss in the previous figure. Explain why is this inefficient and speculate on its magnitude relative to a more elastic supply curve. 6. Discuss the relationship between the evidence discussed in class (on taxation and labor supply) and the elasticity of the labor supply. 7. Discuss how an advocate of economism could use the model above to advance a specific political agenda (hint: economism does not look at the evidence)

Answer 1

Q.13 simple labor market model with Putect Considering a competition wage rate (w) LS 2 QO . (lence of employment] Hue the price is the wage rate paid to the workus and quantity is the level of employment or the anout of workers hired by the birm : 1. Hue the selle are the flims, businesses etci and bite sellers are the workers or the wage earners. 22 Now the government wants to increase revenue, and decides to inplemant a fan on the labor market. - Now it the tau is emposed on workus, then the labor demand care (ld) will shift down word by the amonet of tau and if the tan is imposed on firms, the labor supply care (Ls) will shift Weward by the anont of tan. Scanned with CamScanner

panel 2 - Panel A Let tar us tlap Lattan QI QO Tan on Frims Tan on workus Hue when fan is imposed labor on workus, the demand enve Shitits downwad from Ld to Lat tan and Price paid by firms is wd aid Price received by workeus will be ws. Hunce pre tan equilibuum wage rate = wo. aftnit an po wage paid by firms = wd and at an tan wage received by selless=ws Hace tan bunden on firms = (wd-wo) and tau burden on workus = (wo-ws) Now, when the tau is imposed on firms, then the labor supply cnuc skitts upward from is li to dst fan and here also wage paid by CamScanner

firms increase from wo to wd and wage received by workeus fall from wo t ws. Hince here also inden on Firm's ( wd-wo) and tan buden on sellers workus ( wo-ws). . . Hunce in both cases, fins and workus shane o burden of the itan. Hunce it does at malty the tan is imposed on from firms or on the fan is inh Whether workus. . 3 A. tan falls more heavily on the side of the market which is inclastic, Elasticity measure the E how quickly the demand for labor changes as wage rate Charges enelastic demond or supply means, quantity semarded for labor is not responsive to either increase or declinery wage rate. Hunce it the demand or supply i inelastic, as wage rate increase to a sellus canele asily leave the market as not many substituts cue easily leone available , hence they will be forced to stay in the market to and will be paying higher wager af to the the tau. Also, in elastic demand means that ass wage rate falls due to imposition of tan, workus cannot easily leave the market as not may substitutable obs are avaista available in the market hence they reed to stay in the market. Thes, more inclastic the Labor supply of labor demand care, higher is the burden. to stay i I will be forced Scanned with CamScanner

Tanon rims 1. Tan on workers 9Ls Q wo so Ld o Q1 ao no QQo Here before the tan, producu samples is the mea above the inelastic supply Cmul and below the wage rate .. je area of 68 + Area of 2 = Area of A OPQ Akan tan the producen suples is = Area of IZZA only. от Pчи ДоwТ 1. ince due to impositor of tau, area of 100 falls. TO CS Scanned with CamScanner