4. Many students struggled with this question. Here is an opportunity to get it perfect.

a. Suppose the supply of labor (representing the behavior of potential workers) is very inelastic, while the demand for labor (employers) is elastic (elasticity is larger than 1). Use a carefully labelled graph to depict equilibrium in the labor market. On your graph depict equilibrium wage as WE. Explain in words how your graph reflects the inelastic supply and elastic demand curves.

b. Suppose that the government declares that employers must pay the payroll tax (which can be thought of as a sales tax on labor) in full. Illustrate this tax on your graph and show what wage workers earn and what the employer pays (you dont need exact numbers). Who will bear most of the burden? The workers or the employers? Explain how this burden is reflected in your graph.

c. Do some research to find out about the payroll tax in the US. Is there a payroll tax? How large is it? And who is responsible for paying this tax employer, employee, or both? Cite your source. (one or two sentences is plenty for this question)