Question

Question 1: Show work as necessary.

The labor supply curve is given by W = 1/30E_s

The labor demand curve is given by: W = 60 - 1/10E_D

(Supposed to be like 1 over 30 & 1 over 10---> not divided by for reference ^ )

1.A) On a graph, draw the supply curve (label it S), the demand curve (label it D). Indicate clearly where each curve intersects the horizontal and vertical axis.

1.B) At what wage W* and employment level E* will the market be in equilibrium?

1.C) How much producer surplus do firms receive at the equilibrium wage?

1.D) How much worker surplus do individuals receive at the equilibrium wage?

Now suppose the government imposes a payroll tax on firms such that they have to pay $10 in taxes for every worker-hour hired.

1.E) What is the new equation for the labor demand curve?

1.F) After the payroll tax is imposed, what is the new equilibrium employment rate? What is the equilibrium wage that workers receive?

1.G) How much producer surplus is received after the tax?

1.H) How much worker surplus is received after the tax?

1.I) What is government revenue from this tax?

1.J) How much deadweight loss is created by this payroll tax?

Answer 1

SOLUTION :

1A) Labor demand curve will intersect the horizontal axis at (600,0) and vertical axis at (0,60).

Labor supply curve won't intersect the horizontal and vertical axis as well rather it will just pass through origin (0,0).

1B) When the market is in equilibrium, W* =15 and E*= 450

1C) Producer surplus at equilibrium wage = 3375

1D) Consumer surplus at equilibrium wage = 10125