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Suppose the supply of labor is W - t = 10H, where W is the gross wage, t is the tax (in dollars), and H is labor hours. The demand for labor is W = 120 - 2H.
-The dollar value of the distortion caused by a $12 tax is

Question

Quizplus · Accepted Answer

The distortion is the difference between the value of output with the tax and the value of output without the tax. With the tax, the value of output is (120 - 2H) * 10H = 1200H - 20H^2. Without the tax, the value of output is (120 - 2H) * 10H = 1200H - 20H^2. The difference between these two values is 12 * H, which is $12 per hour. Since the tax is $12, the dollar value of the distortion is $12.

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