Question

Question 1: For each of the sections in this part, the competitive market for labor is described by the linear equations:

            N^D = 300 -10W

            N^S = 20W

Where W is the wage per unit of labor paid by firms to workers.

A.1: Suppose the government introduces a new payroll tax, set at $2 per unit of labor employed by a firm. The firm is responsible for submitting the tax to the government. The workers are never told about the tax or what the revenues are used for. After the tax is introduced, what is the wage paid to workers? Show your work. Include a diagram showing your answer and describe the economic incidence of this payroll tax. Who ultimately pays for more of the tax and why?

A.2: Now suppose that when the government announces the new payroll tax, (set at $2 per unit of labor as in A.1) they let workers known that the revenues will fund a new Pharmacare (drug insurance) program. Workers expect to benefit from a Pharmacare program, worth $3 for every unit of labor they supply. In this case, what wage will workers be paid by the firm? Show your work. Include a diagram showing your answer and describe the economic incidence of this tax.

Answer 1