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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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6. Who should pay the tax?

The following graph shows the labor market for research assistants in the fictional country of Universalia. The equilibrium wage is $10 per hour, and the equilibrium number of research assistants is 250.

Suppose the government has decided to institute a $4-per-hour payroll tax on research assistants and is trying to determine whether the tax should be levied on the employer, the workers, or both (such that half the tax is collected from each side).

Use the graph input tool to evaluate these three proposals. Entering a number into the Tax Levied on Employers field (initially set at zero dollars per hour) shifts the demand curve down by the amount you enter, and entering a number into the Tax Levied on Workers field (initially set at zero dollars per hour) shifts the supply curve up by the amount you enter. To determine the before-tax wage for each tax proposal, adjust the amount in the Wage field until the quantity of labor supplied equals the quantity of labor demanded. You will not be graded on any changes you make to this graph.

IMG 1:

For each of the proposals, use the previous graph to determine the new number of research assistants hired. Then compute the after-tax amount paid by employers (that is, the wage paid to workers plus any taxes collected from the employers) and the after-tax amount earned by research assistants (that is, the wage received by workers minus any taxes collected from the workers).

IMG 2:

Suppose the government is concerned that research assistants already make too little money and, therefore, wants to minimize the share of the tax paid by employees. Of the three tax proposals, which is best for accomplishing this goal?

The proposal in which the entire tax is collected from workers

The proposal in which the tax is collected from each side evenly

The proposal in which the tax is collected from employers

None of the proposals is better than the others

Graph Input Tool
(?)
Market for Research Assistants
20
I Wage
(Dollars per hour)
18
16
Labor Demanded
(Number of workers)
Labor Supplied
(Number of workers)
Supply
625
14
12
Demand Shifter
Supply Shifter
10
8
Demand
Tax Levied on
Employers
(Dollars per hour)
Tax Levied on
Workers
(Dollars per hour)
2
50
100 150 200 250 300 350 400 450 500
LABOR (Number of workers)
WAGE (Dollars per hour)

After-Tax Wage Paid by
After-Tax Wage Received by
Tax Proposal
Quantity Hired
Employers
Workers
Levied on
Levied on
(Number of
(Dollars per hour)
(Dollars per hour)
Employers
Workers
workers)
(Dollars per hour)
(Dollars per
hour)
4
2

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