In an economy, the supply curve of labor, S , is given by S ⫽ ⫺100 ⫹ 200wn where w n is the after-tax wage rate. Assume that the before-tax wage rate is fixed at 10.

a. Write a formula for tax revenues as a function of the tax rate, and sketch the function in a diagram with the tax rate on the horizontal axis and tax revenues on the vertical axis. [Hint: Note that w n ⫽ (1 ⫺ t )10, where t is the tax rate, and that tax revenues are the product of hours worked, the gross wage, and the tax rate.] Suppose that the government currently imposes a tax rate of 70 percent.

What advice would you give it?

b. Try this problem if you know some calculus:

At what tax rate are tax revenues maximized in this economy?