Q4. Consider an economy in which the marginal product of labor MPN is MPN = 309 - 2N, where N is the

amount of labor used. The amount of labor supplied, NS, is given by NS = 22 + 12W + 2T, where 10 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?