Question

Cost Benefit Analysis

The federal government is considering opening a new call centre in an Atlantic fishery community. The centre will employ 500 workers with high school education, each working a 40-hour week. A study reveal that the new centre will (a) raise the equilibrium wage rate for high school graduates from $400 to $500 per week, (b) reduce those employment from the private sector from 1500 to 1200 employees (on a 40-hour week basis), (c) induce 400 new workers not originally in the labour force to participate Assume that the average income tax rate for this income range is 10%. Calculate the impacts of the proposal on the following groups: (a) employees working for the new centre, (b) employees in the private sector, (c) the federal government in its role as the tax collector

Answer 1

1.

Correct option: (a) raise the equilibrium wage rate for high school graduates from $400 to $500 per week

Reason: With the opening up of the call center, demand for high school graduates would increase. This would shift their labor demand curve to the right. Keeping supply unchanged, this would lead to an increase in the equilibrium wage rates for high school graduates

2.

(a) employees working for the new center: Disposable income would fall because of the tax. This would reduce their purchasing power and thus AD

(b) employees in the private sector: Unaffected

(c) federal government in its role as the tax collector: Income from tax receipts would increase