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