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E202Exam3.11 - 9(10 pts Describe an earned-income tax...

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8. (15 pts) Suppose the demand and supply curves for unskilled labor in the Corvallis labor market are shown in the figure below. By how much will the imposition of a minimum wage at $15 per hour reduce total economic surplus? Calculate and graph the amounts by which employer surplus and worker surplus change as a result of the minimum wage. Answer : Without a minimum wage, both employers and workers would enjoy economic surplus of $10 (100,000/day)/2 = $500,000/day. With a minimum wage set at $15/hr, employer surplus falls to ($20 - 15) (50,000/day)/2 = $125,000/day, and worker surplus rises to $5 (50,000/day)/2 + $10 (50,000/day) = $625,000/day. The minimum wage thus reduces employer surplus by $375,000/day, and increases worker surplus by $125,000/day. The net reduction in surplus is a deadweight loss of $125,000 - $375,000 = ($15 - $5) (100,000 - 50,000/day)/2 = $250,000/day.
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Unformatted text preview: 9. (10 pts) Describe an earned-income tax credit for workers (and a tax on employers that would raise enough money to pay for it) that would make both workers and employers better off than under the minimum wage. Answer : The government would have to offer a tax credit worth at least $1.40/hr for each of the 100,000 person-hours of employment to match the additional $140,000/day of worker surplus. Because employer surplus is $180,000/day lower under the minimum wage than under the earned-income tax credit, employers would be willing to pay a tax up $180,000 to avoid the reduction in their surplus due to the minimum wage, an amount sufficient to finance the earned-income tax credit required and make workers and employers better off....
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