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equilibrium levels of W and L in this labor market

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 aftertax wage, W(w), will then be equal to the wage paid by firms, W(), times (1-t). What will the new equilibrium levesl for W(f), W(w), and L be in this labor market?

c. What is the governments tax revenu and the deadweight loss from the income tax?

Solution Preview

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

Solution Summary

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

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