2. (Textbook problem 6, page 104) Suppose that the production function is Y = 9K 0.5 Nº.5. With this production function, the marginal product of labor is MPN = 4.5K0.5 N -0.5 The capital stock is K = 25. The labor supply curve is NS = 100[(1-t) w]², where w is the real wage rate, t is the tax rate on labor income, and hence (1-t) w is the after-tax real wage rate. a. Assume that the tax rate on labor income, t, equals zero. Find the equation of the labor demand curve. Calculate the equilibrium levels of the real wage and employment, the level of full-employment output, and the total after-tax wage income of workers. b. Repeat part (a) under the assumption that the tax rate on labor income, t, equals 0.6. c. Suppose that a minimum wage of w = 2 is imposed. If the tax rate on labor income, t, equals zero, what are the resulting values of employment and the real wage? Does the introduction of the minimum wage increase the total income of workers, taken as a group?

2. (Textbook problem 6, page 104) Suppose that the production function is Y = 9K 0.5 Nº.5. With this production function, the marginal product of labor is MPN = 4.5K0.5 N -0.5 The capital stock is K = 25. The labor supply curve is NS = 100[(1-t) w]², where w is the real wage rate, t is the tax rate on labor income, and hence (1-t) w is the after-tax real wage rate. a. Assume that the tax rate on labor income, t, equals zero. Find the equation of the labor demand curve. Calculate the equilibrium levels of the real wage and employment, the level of full-employment output, and the total after-tax wage income of workers. b. Repeat part (a) under the assumption that the tax rate on labor income, t, equals 0.6. c. Suppose that a minimum wage of w = 2 is imposed. If the tax rate on labor income, t, equals zero, what are the resulting values of employment and the real wage? Does the introduction of the minimum wage increase the total income of workers, taken as a group?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

2. (Textbook problem 6, page 104)
Suppose that the production function is Y = 9K 0.5 Nº.5. With this production function,
the marginal product of labor is MPN = 4.5K 0.5 N -0.5.
The capital stock is K = 25. The labor supply curve is NS = 100[(1-t) w]²,
where w is the real wage rate, t is the tax rate on labor income, and hence
(1-t) w is the after-tax real wage rate.
a. Assume that the tax rate on labor income, t, equals zero. Find the equation
of the labor demand curve. Calculate the equilibrium levels of the real
wage and employment, the level of full-employment output, and the total
after-tax wage income of workers.
b. Repeat part (a) under the assumption that the tax rate on labor income, t,
equals 0.6.
c. Suppose that a minimum wage of w = 2 is imposed. If the tax rate on labor
income, t, equals zero, what are the resulting values of employment and
the real wage? Does the introduction of the minimum wage increase the
total income of workers, taken as a group?

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