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    equilibrium levels of W and L in this labor market

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    Suppose that the demand for labor by firms is given by L = 1000 - 100W and the supply of labor from workers is given by L = -400 + 100W, where L represents the number of workers and W is the wage in this labor market.

    a. What are the equilibrium levels of W and L in this labor market?

    b. Suppose the government imposes an income tx of 25% on workers. The workers after tax wage, W(w), will then be equal to the wage paid by firms, W(), times (1-t). What will the new equilibrium levels for W(f), W(w), and L be in this labor market?

    c. What is the government's tax revenue and the deadweight loss from the income tax?

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    Solution Preview

    a. What are the equilibrium levels of W and L in this labor market?
    At the equilibrium, Ls=Ld at the same level of W:
    Then combine both equations:
    1000-100W=-400 + 100W
    solve for W* =7
    and L* =1000 - ...

    Solution Summary

    The equilibrium levels of W and L in this labor market are found. The wage in the labor market of functions are discussed. The deadweight loss from the income tax are given.

    $2.49

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