Consider an economy in which the marginal product of labour is given by MPN = A(150 − N), where N is the amount of labor used. The amount of labour supplied is given by 60 + 5(1 − t)w, where w is the real wage and t is the tax rate on labour income. (a) Suppose A = 2 and t = 20%. Calculate the equilibrium levels of real wage and employment. (b) Suppose that the economy experiences an adverse supply shock and A = 1. Everything else remains the same as before. Calculate the equilibrium levels of real wage and employment in this case. (c) Suppose that the government lowers the labour income tax by 50% following the adverse supply shock, i.e., A = 1 and t = 10%. Calculate the equilibrium levels of real wage and employment in this case.
Consider an economy in which the marginal product of labour is given by MPN = A(150 − N), where N is the amount of labor used. The amount of labour supplied is given by 60 + 5(1 − t)w, where w is the real wage and t is the tax rate on labour income.
(a) Suppose A = 2 and t = 20%. Calculate the equilibrium levels of real wage and employment.
(b) Suppose that the economy experiences an adverse supply shock and A = 1. Everything else remains the same as before. Calculate the equilibrium levels of real wage and employment in this case.
(c) Suppose that the government lowers the labour income tax by 50% following the adverse supply shock, i.e., A = 1 and t = 10%. Calculate the equilibrium levels of real wage and employment in this case.
(d) Use the labour market diagram to illustrate the adjustments from the original equilibrium in part (a) to the equilibrium in part (b) and then the adjustments from the equilibrium in part (b) to the equilibrium in part (c). Explain the adjustments from (a) to (b) and the adjustments from (b) to (c) clearly.
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