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    Question

     The Laffer Curve in a labor market context illustrates

    the relationship between:
    A The wage rate and the level of employment (labor demand). Correct Answer Incorrect Answer
    B The income tax rate and the amount of labor supplied. Correct Answer Incorrect Answer
    C The income tax rate and the total tax revenue collected. Correct Answer Incorrect Answer
    D The real wage and the unemployment rate (Phillips Curve). Correct Answer Incorrect Answer

    Solution

    Solution: While the Laffer Curve is a concept from Public Finance, its primary relationship is between the tax rate and tax revenue. · It suggests that tax revenue is zero at a 0% rate and a 100% rate, implying a peak at an intermediate rate. · In the labor market context, the curve is often rationalized by the idea that very high marginal tax rates reduce the incentive to work (decreasing labor supply, as explained by the substitution effect dominating the income effect), leading to a shrinkage of the tax base and, thus, lower total tax revenue.

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