5. Consider an economy in which the marginal product of labor MPN is = − MPN N 309 2 , where N is the amount of labor used. The amount of labor supplied, NS, is given by = + + NS w T 22 12 2 , where w is the real wage and T is a lump-sum tax levied on individuals.

a. Use the concepts of income effect and substitution effect to explain why an increase in lump-sum taxes will increase the amount of labor supplied.

b. Suppose that = T 35. What are the equilibrium values of employment and the real wage?

c. With T remaining equal to 35, the government passes minimum-wage legislation that requires firms to pay a real wage greater than or equal to 7.

What are the resulting values of employment and the real wage?