The Using the Theory section pointed out that a tax on labor income can cause a deadweight
Question:
The Using the Theory section pointed out that a tax on labor income can cause a deadweight loss, just like an excise tax on a good.
a. Draw a diagram of a labor market in which the equilibrium wage is $20 per hour and total employment is 10,000 workers. On the graph, identify an area that represents total benefits to workers.
b. On the same graph, identify an area that represents total benefits to firms from hiring labor.
c. Draw a second diagram showing the impact of a $10 per hour tax on labor income, collected from workers. On this diagram, identify areas that represent, after the tax, each of the following: (1) the total benefits to workers, (2) the total benefits to firms, (3) the government’s tax revenue, and (4) the deadweight loss from the tax.
Step by Step Answer:
Macroeconomics Principles and Applications
ISBN: 978-1133265238
5th edition
Authors: Robert e. hall, marc Lieberman