9 Extended Problems -The Table Above Shows the Aggregate Production Function in the }

9 Extended Problems
$$\begin{array} { | c | c | } \begin{array} { c } \text { Labor } \\\text { (millions of hours per } \\\text { year) }\end{array} & \begin{array} { c } \text { Real GDP } \\\text { (millions of 2005 dollars) }\end{array} \\\hline 200 & 6,800 \\\hline 240 & 7,680 \\\hline 280 & 8,400 \\\hline 320 & 8,960 \\\hline 360 & 9,360 \\\hline\end{array}$$
-The table above shows the aggregate production function in the economy of Prescottia.The people of Prescottia pay no taxes and are willing to work 248 million hours a year for a real wage rate of $8 an hour,and for each dollar increase in the real wage,they are willing to work 4 million additional hours per year.
a) Draw the economy's aggregate production function.
$$\begin{array} { | c | c | } \begin{array} { c } \text { Wage rate } \\\text { (dollars per hour) }\end{array} & \begin{array} { c } \text { Quantity of labor demanded } \\\text { (millions of hours per year) }\end{array} \\\hline 24 & 200 \\\hline 20 & 240 \\\hline 16 & 280 \\\hline 12 & 320 \\\hline\end{array}$$
b) Prescottia's demand for labor schedule is in the table above.Draw Prescottia's demand for labor and supply of labor curves.
c) What are the economy's full-employment quantity of labor and real wage rate?
What is the country's potential GDP?
d) Suppose that Prescottia's government introduces a 25 percent income tax.Using your graph,what happens to the demand for labor?
What happens to the supply of labor?
Explain.
e) After the tax is imposed,what happens to Prescottia's full-employment quantity of labor?
What happens to Prescottia's potential GDP?

Correct Answer:

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a)See the figure above.

b)See the f...

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