Analysis of Competing Economic Policies
An economy has a total output per worker valued at $100. The government is considering two different policy packages to improve worker outcomes.
- Policy A: This policy reduces taxes, which increases the portion of output available to be divided between the firm and the worker to $80. However, it is anticipated that this will also allow firms to increase their profit share of this available portion to 25%.
- Policy B: This policy involves tax reforms that decrease the portion of output available to be divided to $75. However, the reforms are designed to increase market competition, which is expected to reduce the firms' profit share of this available portion to 10%.
Analyze both policies. For each policy, calculate the worker's final real wage. Based on your calculations, determine which policy is more beneficial for the worker and explain your reasoning.
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