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JZ240 JZ240
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3 weeks ago
Equity of Taxation

The graph shows the demand (D) and supply (S) in the labor market, where P represents the wage rate and Q represents the number of hours worked per week.
 
Assume that P1=$18.50, P2=$57.25, P3=$81.75, Q2=25, and Q3=47. Suppose the government decides to levy an income tax that shifts the supply curve to Stax. What is hourly tax? The worker pays ________ percent of the tax and the employer pays ________ percent of the tax.
Please round your final answer to two decimal places.

▸ $24.5, 100%, 0%

▸ $63.25, 61.26%, 38.74%

▸ $24.5, 0%, 100%

▸ $63.25, 38.74%, 61.26%
Textbook 

Macroeconomics


Edition: 3rd
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harrison5692harrison5692
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3 weeks ago
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$63.25, 38.74%, 61.26%

The hourly tax is the vertical difference between the supply curve (S) and the supply curve with the tax (Stax).
Hourly tax = P3 - P1 = 81.75 - 18.50 = $63.25.

Before the tax, market equilibrium occurs where supply (S) equals demand (D), at a price of P1 = $18.50 and a quantity of Q3 = 47.
After the tax, market equilibrium occurs where supply with the tax (Stax) equals demand (D), at a price of P2 = $57.25 and a quantity of Q2 = $25.

In the case of the labor market, workers are the suppliers of labor. The tax incidence for suppliers is the difference in what the worker received before the tax and what the worker receives after the tax.
After the tax, the worker receives P2 - tax = 57.25 - 63.25 = -$6
Tax incidence for workers = P1 - -6 = 18.50 - -6 = $24.5

In the case of the labor market, employers are the demanders of labor. The tax incidence for demanders is the difference in what the employer pays after the tax and what the employer paid before the tax.
Tax incidence for consumers = P2 - P1 = 57.25 - 18.50 = $38.75

Therefore, the worker pays 100*24.5/63.25 = 38.74% of the tax.
The employer pays 100*38.75/63.25 = 61.26% of the tax.
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