Question

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.

Answer 1

15.6 billion hours

Step-by-step 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