Question

In: Economics

3. In the country of Macroland, the labor market is represented by the following equations:                        ...

3. In the country of Macroland, the labor market is represented by the following equations:

                        QD = 600 – 40W

                        QS = -50 + 60W

where Q is the quantity of Labor in millions of workers and W is the wage rate.

(a) Currently the minimum wage Law in Macroland is $10 per hour. Calculate, the number of labor supplied, the number of labor demanded, the number of unemployed and the unemployment rate.              

(b) If Macroland eliminates the minimum wage law, what would happen to total employment, wage rate and the unemployment rate? 0

(c) In a clearly labeled graph, show your results for (a) and (b).

Solutions

Expert Solution

( 3 ).

QD = 600 – 40W

QS = -50 + 60W

( a ) To calculate number of labor demanded and supplied we would substitute the value of W = $10 in the given equations for Qd and Qs.

Labor supplied = Qs = -50 +60*10 = 550. Therefore, at minimum wage the number of units of labor supplied is 550.

Labor demanded = Qd = 600 - 40*10 = 200.

We can see that at the minimum wage number of units of labor demanded by firms is 200.

Therefore, unemployed number of labor at minimum wage would be 550 - 200 = 350.

Unemployment rate at minimum wage = ( 350 / 550 )*100 = 63.63%.

( b ) If there is no minimum wage law, we would simply equate the equations of quantity demanded and quantity supplied to find equilibrium wage rate.

At equilibrium, Qd = Qs

600 – 40W = -50 + 60W

-100W = -650

W = 6.5 ( Therefore equilibrium wage rate is $6.5 ). At this wage, quantity of labor demanded would be eual to quantity supplied. Therefore, there would be full employment at the equilibrium wage and unemployment rate would be zero.

                       

Rahul Sunny answered 7 months ago
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