Posted: December 30th, 2021
4. [10 Points] Taxes are often distortionary, and ?rms everywhere complain about how dividendtaxes (pro?t taxes) affect their hiring decisions. Consider a ?rm that operates a constant returnsto scale technology that uses capital and labor to produce. The ?rm owns K units of capital. The production function is:F (K, N) = zKaNl‘“ The pro?ts of the ?rm are taxed at a rate 7′. That is, for every dollar of pro?ts that the ?rmmakes it must pay 7′ to the government. The owners of the ?rms claim that this reduces their incentives to create jobs. (a) Pose the ?rm’s problem (the ?rm cares about after tax pro?ts).(b) Find the ?rm’s FOC for labor. Interpret it. (c) After a lot of lobbying the government agrees to reduce dividend taxes (reduce ’7′). Will thisinduce the ?rm to hire more labor? Explain why or why not.
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