The Table Above Shows the Aggregate Production Function in the per

question 95

Essay

$\begin{array}{|l|l|}\hline \begin{array}{l}\text { Labor } \\\text { (millions of hours per } \\\text { year) }\end{array} & \begin{array}{l}\text { Real GDP } \\\text { (millions of 2005 dollars) }\end{array} \\\hline 200 & 6,800 \\\hline 240 & 7,680 \\\hline 280 & 8,400 \\\hline 320 & 8,960 \\\hline 360 & 9,360 \\\hline\end{array}$
The table above shows the aggregate production function in the economy of Prescottia. The people of Prescottia pay no taxes and are willing to work 248 million hours a year for a real wage rate of $8 an hour, and for each dollar increase in the real wage, they are willing to work 4 million additional hours per year.
a) Draw the economyʹs aggregate production function. $$\begin{array} { | l | l | } \hline \begin{array} { l } \text { Wage rate } \\\text { (dollars per hour) }\end{array} & \begin{array} { l } \text { Quantity of labor demanded } \\\text { (millions of hours per year) }\end{array} \\\hline 24 & 200 \\\hline 20 & 240 \\\hline 16 & 280 \\\hline 12 & 320 \\\hline\end{array}$$
b) Prescottiaʹs demand for labor schedule is in the table above. Draw Prescottiaʹs demand for labor and supply of labor curves.
c) What are the economyʹs full-employment quantity of labor and real wage rate? What is the countryʹs potential GDP?
d) Suppose that Prescottiaʹs government introduces a 25 percent income tax. Using your graph, what happens to the demand for labor? What happens to the supply of labor? Explain.
e) After the tax is imposed, what happens to Prescottiaʹs full-employment quantity of labor? What happens to Prescottiaʹs potential GDP?

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