Let L denote the level of employment (measured in thousands of worker hours), an
ID: 1132435 • Letter: L
Question
Let L denote the level of employment (measured in thousands of worker hours), and W the hourly wage. Suppose that the supply of labor is given by Ls =-30+5W and that the demand for labor is 60-4W a. Draw the labor demand and supply curves indicating the numerical values of the intersection points with each axis, and calculate the equilibrium wage and employment b. What would happen if the wage rate was instead W 8? Is this an equilibrium? Why? Why not? c. Assume that a union imposed a wage floor of $14 per hour. What would be the resulting allocation under this scenario? d. Which of the three allocations in (a)-(c) are Pareto optimal allocations? Explain why an allocation is efficient and, if one (or more) are not optimal, explain which market failure they represent. e. Now assume that you start with the equilibrium from part (a) and there is an influx of working-age immigrants in the economy which changes the labor supply to LS-6 + 5W. Explain how we can reach an equilibrium allocation due to this shock, and then calculate numerically the new allocation. f. Explain a scenario where the W 8 could represent an equilibrium due to (i) a demand shock and (ii) a supply shock. g. Is the equilibrium in (a) and (f) Pareto efficient? Why (why not)?Explanation / Answer
(c) When W = $14,
LD = 60 - (4 x 14) = 60 - 56 = 4
LS = - 30 + (5 x 14) = - 30 + 70 = 40
Since LD < LS, there is an excess supply of labor, creating a surplue (higher unemployment) in labor market.
Equilibrium quantity of labor = min(LD, LS) = min(4, 40) = 4
Surplus = LS - LD = 40 - 4 = 36
(d) Only allocation (a) is Pareto efficient since in this case, labor market obtains equilibrium where quantity of labor demand and supplied are equal at the market-dtermined wage rate.
In case (b), wage rate of $8 is less than equilibrium wage rate of $10 [derived in part (a)], therefore this is a price ceiling which is a form of market failure, leading to shortage in labor market. In case (c), wage rate of $14 is higher than equilibrium wage rate of $10 [derived in part (a)], therefore this is a price floor which is a form of market failure, leading to surplus in labor market.
(e) Influx of immigrants will increase market supply of labor which will shift the labor supply curve rightward, which will decrease wage rate. New equilibrium is reached when LD equals new LS:
60 - 4W = 6 + 5W
9W = 54
W = $6
L = 60 - (4 x 6) = 60 - 24 = 36
(f)
(i) Wage of $8 is lower than equilibrium wage of $10. This is possible when demand for labor decreases (for example, when firms expect an economic downturn and lowers their output) and labor demand curve shifts leftward. Otherwise,
(ii) This is possible when supply of labor increases (for example, due to higher immigration) and labor supply curve shifts rightward.
NOTE: As per Chegg Answering Policy, first 4 of the required parts have been answered.
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