Employers in a city must pay a specific tax of $t per hour worked by t

Employers in a city must pay a specific tax of $t per hour worked by their employees while employers in the suburbs of the city do not have an employment tax. What does a general equilibrium approach predict regarding the wages and employment of both the city and suburban workers if the city decides to substantially reduce their employment tax rate?

A) Wages will increase in the city, but not in the suburbs, and employment will increase in both.
B) Wages will increase in both the city and the suburbs, but employment will fall in both.
C) Wages will increase in both the city and suburbs, employment will increase in the city, but decrease in the suburbs.
D) Wages will increase in both the city and the suburbs, employment will decrease in the city, but increase in the suburbs.

ANSWER

C