This topic contains a solution. Click here to go to the answer

Author Question: This question has you determine the effect of a tax on labor on the long-run cost function. Consider ... (Read 40 times)

codyclark

  • Hero Member
  • *****
  • Posts: 538
This question has you determine the effect of a tax on labor on the long-run cost function. Consider a firm with the production function f(L,K) = LK. The wage rate and rental rate on capital are w and r, respectively. a.
 
  Using the Lagrangian, derive the long-run cost function for this firm. b. Suppose the government taxes labor at by an amount t per unit of labor. Rewrite the long-run cost function including the tax. Hint: the effective wage rate is now w + t. c. Compute the marginal effect of the tax on the long-run cost function. To do so, compute the partial derivative of the cost function with respect to t. Does an increase in the tax increase the cost linearly?

Question 2

Social Security contributions are a tax on labor.
 
  a. True b. False



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by a Subject Expert

tuwy

  • Sr. Member
  • ****
  • Posts: 336
Answer to Question 1

a. The Lagrangian is
L = wL + rK + q  LK
The first-order conditions are
LL = w  aK = 0
LK = r  bL = 0
L = q - LK
Combining the first two conditions:
w/r = K/L
Rearranging yields
K = wL/r
Substituting into the third condition:
q = wL2/r
Solving for L:
L = (qr/w)1/2
Solving for K:
K = (qw/r)1/2
The cost function is
C(w,r,q) = w(qr/w)1/2 + r(qw/r)1/2 = 2(qwr)1/2
b. Replace w with w + t in the cost function above.
C(w + t, r, q) = 2q(w + t)r1/2
c. The derivative is:
Ct = (qr)1/2(w + t)-1/2
The tax does not increase the costs linearly in q.

Answer to Question 2

a




codyclark

  • Member
  • Posts: 538
Reply 2 on: Jul 1, 2018
Thanks for the timely response, appreciate it


TheNamesImani

  • Member
  • Posts: 334
Reply 3 on: Yesterday
YES! Correct, THANKS for helping me on my review

 

Did you know?

More than 50% of American adults have oral herpes, which is commonly known as "cold sores" or "fever blisters." The herpes virus can be active on the skin surface without showing any signs or causing any symptoms.

Did you know?

The most dangerous mercury compound, dimethyl mercury, is so toxic that even a few microliters spilled on the skin can cause death. Mercury has been shown to accumulate in higher amounts in the following types of fish than other types: swordfish, shark, mackerel, tilefish, crab, and tuna.

Did you know?

A seasonal flu vaccine is the best way to reduce the chances you will get seasonal influenza and spread it to others.

Did you know?

Elderly adults are at greatest risk of stroke and myocardial infarction and have the most to gain from prophylaxis. Patients ages 60 to 80 years with blood pressures above 160/90 mm Hg should benefit from antihypertensive treatment.

Did you know?

According to the National Institute of Environmental Health Sciences, lung disease is the third leading killer in the United States, responsible for one in seven deaths. It is the leading cause of death among infants under the age of one year.

For a complete list of videos, visit our video library