Assume the labor market is in equlibrium (a) With wages on the vertical axis and employees...

Assume the labor market is in equlibrium

(a) With wages on the vertical axis and employees on the horizontal axis, draw the supply and demand curves and show the optimal wage (w∗) and employment level (E∗). Now, assume the government has introduced a tax on employers. Show graphically what will happen in the short-run (one shift) and in the long-run (two shifts). What happened to the equilibrium wage and employment after each shift?

(b) Draw a new graph using the supply and demand curves. This time assume the tax is applied to the employees. Again show graphically what happens in the short-run (one shift) and the long-run (two shifts). What happened to the equilibrium level of wage and employment after each shift?

(c) How does the new equilibrium in part a compare to part b? Explain.

Expert Solution

Rahul Sunny answered 2 years ago

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