Question

Part IIL Suppose Hong Kildong, the King of Yuldo, imposes an additional payroll tax on the government employees. (We know Hong Kidong does not like the governmental officials.) He decides to throw the additional tax revenue into the East Sea near Dokdo as he believes that the only purpose of the tax is to penalize the government employees. Assume that there are only two sectors Governmental and non-governmental sectors) and two perfectly mobile factors (capital and labor) and that all the productivity levels of all the employees are identical. Using diagrams will help you answer the following questions. 1. Do the workers in the non-governmental sector share som 2. How does the equilibrium employment level in the non e of tax burden? the tax is imposed by Hong Kildong Now suppose the two sectors have the same elasticities of substitution between capital and labor. Also assume that the two sectors have the same capital-labor ratios, and that the slopes of the isoquants on any points that lie on the same ray from the origin are all the same as we did in class. 3. How would the output effect affect r/w? 4. How would the factor substitution effect affect t/w? 5. What would be the combined effect on r/w? 6. To what extent would the burden be shifted from labor to capital? Will K and L bear a proportional burden? Will K bear a greater burden? Will L bear a greater burden? sector were relatively labor intensive? the same factor intensities but the elasticity of substitution in the governmental sector was 7. To what extent would the burden be shifed from labor to capital if the governmental 8. To what extent would the burden be shified from labor to capital if the two sectors had zero

Answer 1

1.The workers in the non governmental sector do face the burden of taxes as because of the tax there is underinvestment in human capital say in education

tho changes int auailable to bty the Lo cue to x and ago gue thom Us.e

4.The factor substitution effect will be such that wages will reduce and rent will increase.This happens due to the fact that the w/r ratio has to fall as the mpl/mpk ratio has already fallen