Labor Supply Problems and Solutions

Labor Supply Problems and Solutions - Candidate Answers...

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Candidate Answers Homework #4 ECON 402 – Spring 2014 1. How would the following affect the supply of labor? “A temporary income tax subsidy reduces the percentage of income that one must pay in taxes, for the current year only.” Assume that taxes are proportional to income. Because this is temporary, your permanent income only increases slightly. Accordingly, you increase both consumption and savings, but the marginal propensity to consume out of temporary changes in income are small. Regarding labor, you will take advantage of the higher wage and will work more hours. Since your income doesn’t increase materially, there is little or no income effect. 2. Analyze the effect of technological advances that have increased workers’ productivity in the last few decades (e.g., the Internet). What would be the effect on the real wage, employment, and output, if the labor supply curve does not shift? This increases the marginal product of labor, ergo labor demand. The quantity of labor demanded increase, and the real wage also increases.
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