a)
To find the equation of the labor demand curve, the equilibrium levels of the real wage and employment, the level of full-employment output, and the total after-tax wage income of workers.
a)
Explanation of Solution
Given,
The production function:
The amount of capital is 25.
The labor supply curve:
Where, ‘W’ is the real wage rate and ‘t’ is the tax rate on labor income.
Since MPN = W
If t = 0, then labor supply is:
At equilibrium, labor supply is equal to the labor demand. Setting labor supply equal to labor demand gives
If W = 1.5, then labor supply is:
The total after-tax wage income of workers is:
NS × (1-t)W, which is equal to 337.5(225×1.5).
b)
To find the equation of the labor demand curve, the equilibrium levels of the real wage and employment, the level of full-employment output, and the total after-tax wage income of workers, when t = 0.6.
b)
Explanation of Solution
From the previous part, marginal product of labor is:
If t = 0.6, then labor supply is:
The total after-tax wage income of workers is:
NS × (1-t)W, which is equal to 85.38 (90 × 0.4×2.37).
Here, output and income both decreases, although the wage is higher.
c)
The value of employment and real wage, when w = 2 and t = 0.
c)
Explanation of Solution
The minimum wage w = 2 and tax rate t = 0.
If t = 0, then labor supply is:
Since labor supply is equal to 400 and labor demand is equal to 126.6, so labor
Total income of the workers is:
wage × N = 2 × 126.6 = 253.2,which is lower than without a minimum wage (= 337.5), because employment has declined so much.
Therefore, introduction of minimum wage decreases the total income of workers.
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Chapter 3 Solutions
MACROECONOMICS-MYLAB ECONOMICS
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