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relationship between excess burden of tax and demand and supply

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The city of Trenton is considering a substantial annual per employee tax on Trenton State College. Suppose that the labor supply curve to TSC is relatively flat because the employees have alternative places to work, and that the College has limited liability to substitute machines or other inputs for people.

a. Show this situation in the market for labor graphically and explain who bears most of the burden of the tax.

b. Now consider the market for a college education as well. Suppose the College has an upward sloping supply curve and discuss how it changes in response to the tax. Suppose that there is a downward sloping demand for a TSC education. Show who else bears part of the burden of the tax.

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Solution Summary

This job shows how the relationship between excess burden of tax and demand and supply operates. The situation in the market for labor graphically is determined.

Solution Preview

I attached some figures that show how the relationship between excess burden of tax and demand and supply. We can see that the flatter the supply curve, the less tax burden born ...

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