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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.
-What fraction of this tax is borne by the workers?

Question

Quizplus · Accepted Answer

To find the fraction of the tax borne by the workers, we first need to find the equilibrium before and after the tax. Initially, without the tax, the supply equals the demand: $W = 10H = 120 - 2H$. Solving this equation gives us the initial equilibrium without tax. Adding the tax, the new supply equation becomes $W - t = 10H$, and we keep the demand equation the same. To find the new equilibrium, we solve these two equations together. The fraction of the tax borne by the workers is the change in the wage they receive divided by the total tax. Solving these equations shows that workers bear 5/6 of the tax burden, as the supply curve is perfectly inelastic, indicating that workers absorb most of the tax impact due to their inability to reduce labor supply in response to the tax.

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