a. Consider a labour market with a perfectly inelastic supply and a somewhat elastic demand (i.e. downward sloping demand). Now introduce a payroll tax whose statutory burden falls on firms only. Graphically show which curve is affected by this payroll tax and how the equilibrium changes. State how the actual burden of the tax is split between firms and workers in the market.

b. Now suppose that the government introduces a minimum wage equal to the equilibrium wage before the payroll tax was introduced. show a second graph depicting this new labour market. Graphically show how the tax changes the curves and the equilibrium. State how the actual burden of the tax is split between firms and workers in the market.

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a When a payroll tax is introduced the burden falls on firms which affects the cost of labor for businesses This increase in labor cost leads to a shi... View the full answer