Question

Consider the market for labor is segmented into the market for low skilled labor and the market for high skilled labor. If the low skilled labor market is given by the following function: labor demand: w = 35 – 0.005L; and labor supply is 4000. If the high skilled labor market is given by the following functions: labor demand: w = 400 – 2L, and the labor supply function is given by   w = 160 + 1.2L. The hourly wage in both is given by w, and L is the number of workers.

Show both numerically and with corresponding graphs (for the two markets) the equilibrium wages and number of workers in the low skilled labor market and the high skilled labor market. (4 points)

Suppose the government needing to provide some basic services decided to place a tax on labor income and chooses a progressive tax structure where it taxes the low income earners at a rate of $3 per labor hour, and the high income earners at rate of $112 per labor hour. Compute the total revenues the government will get from this tax scheme and the deadweight loss associated with this. (4 points)

Answer 1

Answer (2)

2. Suppose the government needing to provide some basic services decided to place a tax on labor income and chooses a progressive tax structure where it taxes the low-income earners at a rate of $3 per labor hour, and the high-income earners at the rate of $112 per labor hour. Compute the total revenues the government will get from this tax scheme and the deadweight loss associated with this.

For Low income, a rate of $3 per labor hour, the wage would be 15+3=18

At 18, the labor demand would be 3400,

The government revenue is

the area of the square

= l*b

=3400*3

=10200

deadweight loss = 900= ½*600*3

For high income, a rate of $112 per labor hour, the wage would be 250+112=362

At 362, the labor demand would be 19,

The government revenue is

the area of the trapezoid

= (a+b)/2*h

=(67+90)/2*19

=1491.5

deadweight loss = 5012= ½*179*56