Question

Table 1 Table 1 describes the labor market in LowTaxLand and Table 2 describes the economy's production function. Initially, LowTaxLand introduces an income tax of $1 per hour worked. Then it doubles its income tax to $2 an hour. Real wage rate (dollars per hour) 10.00 10.50 11.00 11.50 12.00 12.50 Quantity of labor demanded supplied (thousands of hours) 18 15 9 12 12 9 15 6 18 3 21 Following the implementation of the $2 an hour income tax, what are the levels of employment and potential GDP? What is the real wage rate paid by employers and the after-tax real wage rate received by workers? >>> Remember that employment is measured in thousands of hours in the table. The level of employment is hours. Table 2 Real GDP The real wage rate paid by employers is an hour and the after-tax real wage rate received by workers is $ an hour. >>> Answer to 2 decimal places. Employment (thousands of hours) 6 9 12 15 18 21 (millions of dollars) 7 12 16 19 21 22 Potential GDP is $ million.

Answer 1

Ans.

Given, increase in tax rate by $2.

Wage after tax is 10 + 2 = $12 .

So , at $12 the demanded hours Qd = 6000 hours ( from table 1)

Hence level of employment is at 6000 hrs.

So , the real - wage which is being paid = $12 ( 10 + 2 tax)

after tax wage = $10 ( 12 - 2 tax)

At 6000 hrs potential GDP is at 7 million dollars.(from table 2 )

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