Laffer curve. In an economy, the supply curve of labor S is given by S = -100 + 200wt where wt is the after-tax wage rate. Assume that the before-tax wage rate is fixed at 10. Thus
wt = (1 - t)*10.
a. What is a formula for tax revenues as a function of the tax rate, and sketch the function in a diagram with the tax rate on the horizontal axis and tax revenues on the vertical axis (i.e., a Laffer curve). Suppose that the government currently imposes a tax rate of 70 percent. What advice would you give it?
b. At what tax rate are tax revenues maximized in this economy?