Suppose the production function for France is givenby: The capital stock is K =

Question

Suppose the production function for France is givenby:

The capital stock is K = 25 and the laboursupply curve is:

Ls = 100[(1 -t)w]2

where w is the real wageand t is the tax rate on labour income.

(a) Assume that the tax rate on labour income(t) equals zero. Find the equation of the labourdemandcurve. Calculate the equilibrium levels of the real wage andemployment and output.Also find the total after-tax wage income ofworkers.

(b) Repeat part (a) under the assumption that the tax rateon labour income is t =0:6.

(c) Suppose that a minimum real wage ofw = 2 is imposed. If the tax rate on labour incomeequalszero, what are the resulting values of employment and thereal wage? Does the introduction ofa minimum wage increase thetotal income of workers, taken as a group?

Explanation / Answer

c)When minimum real wage equal to 2, Labor demand 22.5/L0.5= w 22.5/L0.5= 2 L = 126.56 Labor supply L = 100[w]2 L = 100[2]2 L = 400 Now, labor supply is surplus. The real wages will be 2, however values of employment only equalto 126.56 Initial total income = 225*1.5 = 337.5 Total income with minimum wages = 126.56*2 = 253.12 The total income is decrease for the whole group.

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