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Assume that the labor supply curve is upward sloping

Economics Oct 28, 2020

Assume that the labor supply curve is upward sloping. Should the labor supply curve shift to the left or to the right if any of the following changes happen? Show each case in a graph. (a) the dividends paid by the firms decrease (increase)? (b) the government raises the lump sum taxes? (c) the government introduces a proportionate labor income tax?

Expert Solution

a)An upward-sloping labor supply curve represents a case in which the substitution effect of higher wages outweighs the income effect. ... To maximize profits, the firm will use labor up to the point at which the value of the marginal product of labor equals the wage. This means the marginal product will equal the real wage.

The labor supply curve traces out the relationship between the wage rate and hours of work.So the increase or decrease in dividend will cause the supply curve to shift .

b)If the govt raises the lumpsum taxes then the supply curve will shift to the left as the tax on sellers raises the cost of producing and selling the good, it reduces the quantity supplied at every price.So the supply curve shifts to the left. The equilibrium price rises and the equilibrium quantity falls. Once again, taxes reduce the size of the market.

c) When the government imposes a proportional tax on wage income, the consumer’s budget constraint is now given by: C = w 1( , − t)(h − l) + π −T where t is the tax rate on wage income

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