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