For the economy of Lower Volta,the MPN is given by MPN = 400 - 0.2N where N is aggregate employment.The aggregate quantity of labour supplied is 500 + 10(1 - t)w where t is the income tax rate and w is the real wage.Assume that the income tax rate is 50%.What is the before-tax real wage?
A)150
B)200
C)250
D)300

Question

Quizplus · Accepted Answer

The before-tax real wage is 150. This can be calculated by substituting the given values into the equation for the aggregate quantity of labour supplied and solving for w:500 + 10(1 - t)w = N500 + 10(1 - 0.5)w = N500 + 5w = Nw = (N - 500)/5Substituting this expression for w into the equation for the MPN, we get:MPN = 400 - 0.2NMPN = 400 - 0.2(500 + 5w)MPN = 400 - 100 - wMPN = 300 - wSetting the MPN equal to the aggregate quantity of labour supplied, we get:300 - w = (N - 500)/5300 - w = (500 + 5w - 500)/5300 - w = w2w = 300w = 150

For the Economy of Lower Volta,the MPN Is Given by MPN