5. Consider an economy in which the marginal product of labor MPN is MPN =309−2N

, where is the amount of labor used.

N The amount of labor supplied, NS, is given by NS =22+12w+2T

, where sum tax levied on individuals.

is the real wage and w

is a lump T

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 remaining equal to 35, the government passes T

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?