Question

1.

a. A firm is currently in equilibrium. They use workers and capital in production. Suppose that they undergo a positive technology​ change, making workers more productive. How will this affect their choice of labor used in​ production? When will they stop making​ changes, if​ any

b. In early​ 2018, President Trump endorsed a 25​ cent-per-gallon gas tax increase. Would this tax be​ progressive, regressive, or​ proportional?

Answer 1

1.

(a) Making workers more productive implies that the output of the workers put in is more than their input.

The workers will now get higher wages even when they work for a reduced amount of time owing to the positive technological change. But, since the Firm's motive is to maximize their profits and they can get the same amount of work done by lesser number of workers, it would let go of many employees.

They will stop making changes once the marginal revenue product of labour equals the prevailing wage rate i.e, the additional revenue the firm can generate by hiring an additional labor.

(b) Trump's endorsement of a 25 cent/gallon gas tax increase is regressive;

A regressive tax takes a higher percentage of lower incomes than of higher incomes. e.g. Let A be a person earning 10000$ a month and B be a person earning 50000$ a month. This means that A would part with a larger chunk of his income and B parts with only a smaller chunk. Hence. it is a regressive tax.

Although the regressive nature of the tax is visible, but the same rate of this tax is applied to everybody, hence it is proportional too.