Consider a representative firm that faces a constant returns to scale production function Y = zF(K,...

Consider a representative firm that faces a constant returns to scale production function Y = zF(K, Nd ), where Y is output of consumption goods, z is TFP, K is physical capital, and Nd is labour input. The amount of capital is assumed to be given and fixed. The production function exhibits a positive marginal product of labour, as well as diminishing returns to labour. The firm seeks to maximize profits. Suppose that the government imposes an output tax Ty < 1 per unit of consumption good produced, and a hiring tax of Tn > 0 units of the consumption good for each unit of labour the firm hires. Show the joint effect of these taxes on the firm's profit maximization problem, optimality condition, and demand for labor, using both equations and graphs. For a given wage rate, what will be the effect on average labour productivity?

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Rahul Sunny answered 1 year ago

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