Question

The following graph shows the labor market for research assistants in the fictional country of Academia. The equilibrium wage is $10 per hour, and the equilibrium number of research assistants is 250 Suppose the government has decided to institute a $4-per-hour payroll tax on research assistants and is trying to determine whether the tax should be lev.Apa ADD employer, the workers, or both (such that half the tax is collected from each side) Use the graph input tool to evaluate these three proposals. Entering a number into the Tax Levied on Employers field (initially set at zero dollars per hour) shifts the demand curve down by the amount you enter, and entering a number into the Tax Levied on Workers field (initially set at zero dollars per hour) shifts the supply curve up by the amount you enter. To determine the before-tax wage for each tax proposal, adjust the amount in the Wage field until the quantity of labor supplied equals the quantity of labor demanded. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly Graph Input Tool Market for Research Assistants 20 Wage Dollars per hour) Labor Demanded (Number of workers) 18 4 16 Labor Supplied (Number of workers) Supply 625 0 14 12 Demand Shifter Supply Shifter 10 ー Demand Tax Levied on Employers (Dollars per hour) Tax Levied on Workers Dollars per hour) 0 50 100 150 200 250 300 350 400 450 500 LABOR (Number of workers)

Answer 1

Tax Proposal		Quantity Hired	After- Tax wage paid by Employers	After -Tax wage received by workers
Levied on Employers	Levied on Workers
4	0	125	12	8
0	4	125	12	8
2	2	125	12	8

The correct answer is D) because in all the three scenarios the burden on empIoyers is 2 and they hire same amount of labor.

SoIution

We will find the equation for demand and supply for labor.

For demand use points (L, w) = (0, 14) and (250,10)

Demand: L = 875-62.5w

For supply use points (L, w) = (0, 6) and (250,10)

Supply: L = 62.5w -375

*With tax on the Employers demand wiII change

New demand: L = 875 -62.5(w+4)

Thus L = 625 -62.5w

For equilibrium equate suppIy equaI demand

625 -62.5w = 62.5w -375

1000 = 125w. Thus w_worker = 8 and w_employer = 12

*With tax on worker supply will change

New supply: L = 62.5(w-4) -375

L = 62.5w – 625. At equilibrium equate demand equal supply.

62.5w -625 = 875 -62.5w

125w = 1500

w_empIoyer = 12 and w_worker = 8.

*With tax on both the employer and the worker. Both demand and supply will change.

New demand: L = 875 -62.5(w+2)

Thus L = 750 - 62.5w

New supply: L = 62.5(w-2) -375

L = 62.5w – 500. At equilibrium equate demand equal supply.

62.5w -500 = 750 -62.5w

125w = 1250

W_worker =8, w_employer = 12