-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 economy's aggregate production function.
b) Prescottia's demand for labor schedule is in the table above. Draw Prescottia's demand for labor and supply of labor curves.
c) What are the economy's full-employment quantity of labor and real wage rate? What is the country's potential GDP?
d) Suppose that Prescottia's 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 Prescottia's full-employment quantity of labor? What happens to Prescottia's potential GDP?
Definitions:
Process Costing
A costing method used where similar products are produced continuously, allocating production costs based on the process or department.
Conversion Cost
The total cost of transforming raw materials into finished goods, including labor and manufacturing overhead.
Conversion Costs
The combined costs of direct labor and manufacturing overhead incurred to convert raw materials into finished products.
Process Costing
An accounting method used for homogeneous products, where costs are accumulated over a period and then allocated to units produced.
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