If the tax elasticity of labor supply is 0.16, by what percentage will the quantity of labor supplied increase in response to Instructions: In part b, enter your response as a percentage rounded to one decimal place. a. A $500 per person income tax rebate check? A 4.5% increase A 2% increase A 1.5% increase No increase b. A reduction of 5 percent in marginal tax rates?

If every work receives a tax rebate of $500 per person income tax the quantity of labor supplied will not increase because the rebate is a temporary

A 4.5% increase in marginal tax  = 0.16 * 4.5 = 0.72  = 0.7 ( decrease in quantity of labor )

A 2% increase in marginal tax

= 0.16 * 2 = 0.32 = 0.3 ( decrease in quantity of labor )

A 15% increase

= 0.16 * 15 = 2.4 ( decrease in quantity of labor )

No increase = 0.16 = 0.16 ( quantity of labor supplied remains unchanged )

A reduction of 5%

= 0.16 * 5 =  0.8 ( increase in quantity of labor )

Explanation:

Tax elasticity of labor supply = 0.16

What percentage will the quantity of labor supplied increase in response to

A) $500  per person income tax rebate

percentage change in quantity supplied = (tax elasticity of supply) * (percentage change in tax rate ) If every work receives a tax rebate of $500 per person income tax the quantity of labor supplied will not increase because the rebate is a temporary measure and does not have an effect the tax rate in the long run.

B) A 4.5% increase in marginal tax

change in the quantity of labor = tax elasticity * increase marginal tax

                                               0.16 * 4.5 = 0.72  = 0.7 ( decrease in quantity of labor )

A 2% increase in marginal tax

= 0.16 * 2 = 0.32 = 0.3 ( decrease in quantity of labor )

A 15% increase

= 0.16 * 15 = 2.4 ( decrease in quantity of labor )

No increase = 0.16 = 0.16 ( quantity of labor supplied remains unchanged )

A reduction of 5%

= 0.16 * 5 =  0.8 ( increase in quantity of labor )

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