The presence of a distorting tax on wage income can result in

Question

Quizplus · Accepted Answer

When there is a distorting tax on wage income, the marginal revenue product of labor (MRPl) will be equal to the marginal product of labor (MPl) minus the tax. However, the marginal revenue product of capital (MRPc) remains unaffected by the tax.

Thus, in this scenario, the distortionary tax on wage income will lead to a reduction in the marginal product of labor for the firm. As a result, the marginal revenue generated by the marginal unit of labor will also reduce. This means that the marginal revenue product of labor (MRSl,c) will be less than the marginal product of labor (MPn). Hence, option D is the correct answer.

The Presence of a Distorting Tax on Wage Income Can