Suppose That All Workers Place a Value on Their Leisure

question 55

Essay

Suppose that all workers place a value on their leisure of 75 goods per day. The production function relating output per day Y to the number of people working per day N is Y = 500N - 0.4N², and the marginal product of labour is MPN = 500 - 0.8 N. A 25% tax is levied on wages.
a. How much is output per day?
b. In terms of lost output, what is the cost of the distortion introduced by this tax?

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