If the price elasticity of supply of labor is equal to 0.5 and the price elasticity of demand for labor is -2, then which of the following is likely to result from a tax on labor earnings?

Question

Quizplus · Accepted Answer

A tax on labor earnings will decrease the net wage workers receive, which will reduce the marginal benefit of working and decrease the quantity of labor supplied. Due to the low price elasticity of labor supply, workers will bear most of the burden of the tax, but because the price elasticity of labor demand is high, some of the tax will be shifted to employers. This will result in an increase in market equilibrium wages, but the extent to which wages increase will depend on the relative magnitudes of the elasticities of supply and demand. Therefore, choice B is the most likely outcome.

If the Price Elasticity of Supply of Labor Is Equal