Suppose labour supply depends positively on net of tax wage (Wt) and labour demand

depends negatively on gross wage. [5 points]

a) Assuming perfectly flexible wages and prices, what will be the effect on the market

clearing level of employment (N), and output (Y), of a cut in the marginal tax rate

(t).

b) Total tax revenues T = t* Wt*N. What will be the effect of a tax cut on total

revenues?