# 82% T Q of labor market taxes, the marginal cost of a worker is given only by his/her wage. Thus, we have that firms choice of employment are characterized by: Marginal Revenue = Marginal Cost aPy-A = W Question 2 Labor Market Equilibrium Write down the log labor demand equation. p) Find the value of wage w' and employment L' that characterizes the equilibrium. c) Assume that o, = 1 and of = 2. How much does employment grows when A increases by 10%? d) Is the number you obtained in part (c) identical to the elasticity of labor demand with respect to A? Which one is larger? Why? e) The international price of the good that is produced in this labor mar- ket increases from 5 to 9 dollars. Find the change in wages and employment associated with the increase in Py. (Hint: That is an 40% increase in py). f) Draw a graph of the log labor supply equation and the log labor demand equation. h) Draw the graph of the log excess of demand equation (log La-log Ls). Make sure you label the axis, the magnitude of the slope, you identify the height of the intercept, and the exact point that it reaches zero. i) Now, add to the graph the excess of demand equation associated with and increase in py of 80%. How much does the height of the intercept changes? How much does the point in which it reaches zero move? Question 3 Labor Taxes The government decides to introduce labor taxes. Assume that os = 0.5 and od = 2. a) Assume that the taxe is paid by the firms, not the employees. Does the labor supply schedule shift once the policy is introduced? If so, by how much? b) Continue assuming that the tax is paid by the firms. Does the labor demand schedule shift once the policy is introduced? If so, by how much? c) How does the tax affect equilibram wages in this labor market? d) Does the tax changes employment levels? By how much? 10