Use a labor supply and demand diagram to show that a labor tax places a wedge between the wage that firms pay and the wage that workers receive, and causes unemployment.

Use a labor supply and demand diagram to show that a labor tax places a wedge between the wage that firms pay and the wage that workers receive, and causes unemployment. On your graph show the deadweight loss caused by tax

b. Using labor supply and demand diagrams show that the size of deadweight loss changes with the elasticity of labor supply (draw two supply and demand diagrams: one for elastic supply and one for inelastic supply)

c. In what situation we should expect labor supply to be elastic? In what situation we expect it to be elastic? Explain.

Expert Solution

If there are two marketplaces, one with elastic demand and supply and the other with elastic supply. A greater DWL will be facing in the market with dynamic demand and supply. This is because dynamic demand and supply means that buyers and sellers prefer to exit the market as price rises compared to the static market.

c. If the supply is inelastic, the supplied quantity of labour does not change much as wages change. For lower-skilled occupations, which need less preparation, labor supply is usually said to be more elastic.

The supply of labor can not shift too easily for more professional workers. For this situation supply curve is expected to be elastic.

Rahul Sunny answered 2 years ago

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