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Suppose that the production function is Y = 2K 0'5N 0'5. The capital stock is xed at K = 25. The labor supply curve is
Suppose that the production function is Y = 2K 0'5N 0'5. The capital stock is xed at K = 25. The labor supply curve is NS = 100[(1 t)w]2, where w is the real wage and t is the tax rate on labor income. (a) Assume that t = 0. What is labor demand? (b) Still assuming that t = 0, nd the labor market equilibrium in terms of labor hours and the real wage. (c) Still assuming that t = 0, nd fullemployment output and total aftertax income for workers. (d) Assume now that t = 0.5, repeat (a)-(c). (e) Suppose that a minimum wage of w = 0.9 is introduced. How does this change labor market equilibrium in the case of t = 0? What about the case of t = 0.5? How does this change aftertax income for workers in each case
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