If there is an income tax levied on labor income,the labor demand curve ________ and the labor supply curve ________.

Question

Quizplus · Accepted Answer

According to the standard labor market model, a tax on labor income results in a decrease in the opportunity cost of leisure time, causing individuals to supply less labor at every wage rate. Therefore, the labor supply curve shifts leftward. However, the tax also raises the cost of labor to firms, making them demand less labor at every wage rate, which results in a leftward shift in the labor demand curve. The overall effect is a decrease in both the equilibrium quantity of labor and the equilibrium wage rate. Since only labor supply shifts leftward, and labor demand shifts leftward as well, the best answer is (D).

If There Is an Income Tax Levied on Labor Income,the