Consider an economy in which the marginal product of labour MPN is MPN = 309 - 2N, where N is the amount of labour used. The amount of labour supplied, NS, is given by NS = 22 + 12w + 2T, where w is the real wage and T is a lump-sum tax levied on individuals.
a. Use the concepts of income effect and substitution effect to explain why an increase in lump-sum taxes will increase the amount of labour supplied.
b. Suppose that T = 35. What are the equilibrium values of employment and the real wage?
c. With T remaining equal to 35, the government passes minimum-wage legislation that requires firms to pay a real wage greater than or equal to 7. What are the resulting values of employment and the real wage?