Reference no: EM132649420

Consider an individual whose labor supply function is given by ln H = α ln [(1 - t)W], where H is the number of hours of work, W is the hourly wage rate, and t is the tax rate at which labor earnings is taxed. (1 - t)W is the effective wage rate (s), as for every dollar earned, government takes away t dollars and the individual is left with only 1 - t dollars to take home. Assume that α > 0. The government tax revenue (R) is thus, R = tW H(s).

-Calculate the elasticity of labor supply with respect to effective wage rate?

-Is it possible for the government to increase their tax revenue by lowering the tax rate, i.e. is dR/dt < 0 possible? If so, derive a condition on elasticity in part (a) such that it guarantees dR/dt < 0? (This condition should be expressed as a function of t.)