Suppose that a competitive economy’s labour supply consists of 100 units at the after tax wage of $3 per unit. The elasticity of labour supply is 0.25, and there is a flat-rate 40% tax on labour earnings. It is proposed to raise the tax on labour earnings to 50%, and the before-tax wage (which measures the value of the marginal product of labour)

is not expected to change.

i How much extra revenue would the tax change yield?

ii Work out the cost of the additional deadweight loss imposed on the economy by the tax increase.

iii Work out the marginal cost of public funds.