Suppose that all workers place a value on their leisure of 40 goods per day. The production function relating output per day Y to the number of people working per day N is Y = 200N - N^2 and the marginal product of labor is MPN = 200 - 2N. A 20% tax is levied on wages. In terms of lost output, what is the cost of the distortion introduced by this tax?

Suppose that all workers place a value on their leisure of 40 goods per day. The production function relating output per day Y to the number of people working per day N is Y = 200N - N^2 and the marginal product of labor is MPN = 200 - 2N. A 20% tax is levied on wages. In terms of lost output, what is the cost of the distortion introduced by this tax?

Suppose that all workers place a value on their leisure of 40 goods per day. The production function relating output per day Y to the number of people working per day N is 


Y = 200N - N^2


and the marginal product of labor is


MPN = 200 - 2N.


A 20% tax is levied on wages. In terms of lost output, what is the cost of the distortion introduced by this tax?




a. 75
b. 150
c. 225
d. 25


Answer: C