Question

Consider the case of an upward sloping supply curve.

Show on a graph: a. The market equilibrium wage rate and labor supply before the imposition of income tax.

Answer 1

Following graph shows the market for labor before the imposition of income tax -

Equilibrium in labor market is attained at the equality of labor demand curve and the labor supply curve.

As the above figure shows that labor demand curve and labor supply curve are intersecting each other corresponding to point E.

The wage rate corresponding to point E is W1.

So,

The market equilibrium wage rate is $W1 per hour.