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^2and 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
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