In an economy, the supply curve of labor, S , is given by
S = 100 + 200wn
where w n is the after tax wage rate. Assume that the before tax wage rate is fixed at 10.
a. Write a formula for tax revenues as a function of the tax rate, and sketch the function in a diagram with the tax rate on the horizontal axis and tax revenues on the vertical axis. Suppose that the government currently imposes a tax rate of 70 percent. What advice would you give it?
b. Try this problem if you know some calculus: At what tax rate are tax revenues maximized in this economy?

  • CreatedMarch 25, 2015
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