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23 November, 06:23

Suppose households supply 600 billion hours of labor per year and have a tax elasticity of supply of 0.13. If the tax rate is decreased by 20 percent, by how many hours will the supply of labor change? Instructions: Round your response to one decimal place. Labor supply will by billion labor hours.

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  1. 23 November, 06:41
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    15.6 billion hours

    Explanation:

    Data provided in the question:

    Households supply = 600 billion hours of labor per year

    Tax elasticity of supply = 0.13

    Change in tax rate = 20%

    Now,

    Tax elasticity of supply = (% change in supply) : (% change in the tax rate)

    or

    ⇒ 0.13 = (% change in supply) : (20%)

    or

    % change in supply = 0.13 * ( - 20)

    or

    % change in supply = 2.6%

    also,

    % change in supply and % change in tax rate has inverse relationship

    thus,

    With decrease in tax rate the supply will increase

    Therefore,

    The supply of labor will increase by 2.6%

    Number of hours of supply of labor change = 2.6% * 600 billion hours

    = 15.6 billion hours
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