In an economy, the supply curve of labor, LS , is given by, LS = − 100 + 200 wn and wn = ( 1 − t ) wg where wn is the net-of-tax wage rate, wg is the gross-of-tax wage rate and t is a proportional tax rate. Sketch the supply curve of labor. a) Write a formula for tax revenue, T, as a function of the tax rate, t, and draw the function, T(t), in a diagram with the tax rate on the horizontal axis and tax revenues on the vertical axis. Tax revenue is the product of hours worked and the amount of tax per hour worked. You can assume that the before-tax wage rate, wg , is fixed at HK$32.50. You can straightforwardly use Excel software to plot your tax revenue function. Suppose that the government currently imposes a tax rate of 17 percent. What advice would you give it? b) Suppose instead that the government currently imposes a tax rate of 51 percent. What advice would you give it? Is there a Laffer effect? An alternative approach to figuring out this problem is to use simple differential calculus. Using this approach, at what tax rate is tax revenue maximized in this economy? HINT: T(t) = k × t 2 where k is a constant. Marginal Tax revenue MT(t) = = ? ? t T(t) k × 2 × t .