In the automotive labor market in Detroit Metropolitan, the elasticity of demand has been estimated to be -0.40 while the elasticity of supply is estimated at 0.15. Suppose Michigan government is considering imposing a $275 'head tax' per worker employed in the auto industry.

a) Who is more price sensitive in this market, employers or workers?

b) How much of the $275 tax would be borne by employers in the form of higher labor costs per worker, and how much of it would go toward reducing take-home pay for each employee? Show your work.

c) Michigan government amends its law to specify that it is auto companies who will have to pay the $275 per worker to the government directly, not the employees themselves. How does this change your answer to question (b)? Please explain

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Answer a To determine who is more pricesensitive in the market we look at the absolute values of the ... View the full answer