Consider partial factor tax on capital used in food industry

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Reference no: EM13736701

Imagine a world with two goods, food (F) and shelter (S), and two factors of production, labor (L) and capital (K). Assume that labor and capital can be employed in either sector of the econ omy (the food sector or the shelter sector) and that these factors are completely mobile across the two sectors. Assume that the total supply of labor and capital in this world is fixed. Finally, suppose that before any taxes are imposed, the food indust ry is labor intensive. a. Consider a partial factor tax on capital used in the food industry (t KF ). Which factor will bear more of the economic incidence of the tax? Explain your answer. b. How would your answer to (a) change if the food industry and the shelter industry had the same factor intensity (K F /L F =K S /L S )? c. How would you answer to (a) change if capital was immobile (in other words, if labor could not move across the sectors)?

Reference no: EM13736701

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