Question

The big tech firms have made a lot of revenue over a recent boom. The Biden administration starts increasing taxes on the firm revenue to pay off existing debt. Based on the firm’s problem, explain how the tax hike on revenue affects labor demand by the firm. Specifically, you should explain first how the marginal product of labor (MPN) changes in response to the tax hike and then how changes in MPN affect the labor demand.

Answer 1

When the Biden administration increases taxes on firm revenue, it affects labor demand by reducing the profitability of hiring additional workers. This reduction in profitability can lead to a decrease in the firm's marginal product of labor (MPN). The change in MPN then affects labor demand.

Step-by-step explanation:

When the Biden administration increases taxes on firm revenue, it affects labor demand by reducing the profitability of hiring additional workers. This reduction in profitability can lead to a decrease in the firm's marginal product of labor (MPN). The MPN represents the additional output generated by each additional unit of labor. As the tax hike reduces the firm's revenue, the MPN decreases because the firm is unable to generate as much additional output from each additional worker.

The change in MPN then affects labor demand. With a lower MPN, the firm will have less incentive to hire additional workers since the additional output they contribute is lower. As a result, the firm may reduce its labor demand, leading to potential layoffs or a slowdown in hiring.

Overall, the tax hike on firm revenue reduces the firm's profitability, which in turn affects the MPN and subsequently labor demand.