8. (2.5 pts) The following figure shows the labor demand curve, LD2, and labor s

Question

8. (2.5 pts) The following figure shows the labor demand curve, LD2, and labor supply curve, LS1 at the trough of a recession. Six months later, the labor demand curve partially recovers and shifts to LD1 Wage (S) 5 35 ?? 25 10 5 10 15 20 25 30 35 40 Quantity of Labor (units) (1 pt) Refer to the figure above. Everything else remaining unchanged, if the wage is currently rigidly fixed at S30, what will the change in the level of employment, unemployment, the employment rate and the unemployment rate be when the demand curve shifts to LD1? a. b. (1 pt) Refer to the figure above. Everything else remaining unchanged, if the wage is flexible what will the change in the level of employment, unemployment, the employment rate and the unemployment rate be when the demand curve shifts to LD1? (0.5 pt) When is the increase in employment the largest, when the wage is flexible or when the wage is downward rigid? Briefly explain why c.

Explanation / Answer

a) Labor demand curve : LD1 . Labor supply curve : LS1 . Wage : 30$

At wage = 30$ the quantity demand for labor will be 15 and quantity supplied will be 25 units . So unemployment = 25 - 15 = 10 units .

At LD2 it was , 25 - 5 = 20 units of unemployment . Hence unemployment has reduced or employment has increases by 10 units .

b) If the wage is flexible then at LD2 the market cleared at 20$ employing 15 units of labor . But at LD1 the market will clear at 25$ employing 20 units of labor . So employment rate increases , unemployment decreases .

c) When wage is rigid employment increases by 10 units . When wage is flexible employment increases by 5 units . Level of change of employment depends upon the elasticity of the curves .

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