Question

ATVs are produced in a competitive labor. Labor demand in this market is given by ?? = 100 − ? and labor supply is given by ?? = 25 + 4?. Given the high number of on-the-job injuries during product testing, the government has decided that workers irrationally underestimate the need for worker’s compensation insurance coverage. The government is trying to choose whether to provide worker’s compensation through a payroll tax, or to mandate that all firms in this market must provide their own private worker’s compensation insurance coverage to all employees.

a. Find the initial equilibrium wage and employment before worker’s compensation is provided.

b. If the government implemented a payroll tax to provide worker’s compensation, it would need to tax firms at a rate of $5 per hour worked. Find the equilibrium wage and employment level, the firm’s total cost of hiring a worker, and the value of the workers’ compensation.

c. Now suppose that the government mandates that firms provide their own worker’s compensation coverage. The cost to the firms is $5 per hour worked, and on average the workers value the benefit at $2.50 per hour worked. Find the equilibrium wage and employment level, the firm’s total cost of hiring a worker, and the value of the workers’ compensation.

d. If the government’s goal is to maximize employment in in this market, should it implement the payroll tax or mandate that firms provide worker’s compensation?

Answer 1