Suppose you are studying the market for employees in a given competitive labor market in the...

Suppose you are studying the market for employees in a given competitive labor market in the US. The labor supply is given by: Supply : w = L+2 where w is the wage per hour worked and L is the number of employees in thousands. The demand for labor in this industry is given by: Demand : w = 20 − L, with L the number of employees in thousands.

(a) Based solely on the information given, can leisure be a normal good? If yes, underwhich condition?Currently there is a national minimum wage policy at $7 dollars per hour worked.

(b) Find the equilibrium wage and employment in the market. What is the effect of the minimum wage? Will there be unemployment? If yes, how many people?

(c) One of the candidates supports raising the minimum wage to $15 per hour. How will this policy affect employment and unemployment? Be precise. In what way is it different from the previous minimum wage? Now, suppose that, for some cities in the US, the industry you are studying is actually composed of a single firm hiring workers. Suppose that the labor supply is still the same, which yields the following marginal cost of labor: MCL = 2L+2

(d) On the graph below, draw the demand, supply and marginal cost of labor in such a case. Make sure to label all intercepts. Explain why the marginal cost of labor is higher than the supply for labor.

wage

Labor (thousands)

(e) Find the monopsony wage wm and level of employment Lm, and label them on the graph in part (d). What is the unemployment level? Show your work.

(f) A competitor candidate claims that the $15 minimum wage per hour is too high and says: “We indeed need to raise the minimum wage, but a rise to $9 dollars per hour will be best. It will both create jobs and prevent people being from being fired”. Compare the effect of the three minimum wage policies ($7, $15, and $9 an hour) in single employer cities in terms of the employment level and unemployment. Be precise.

Expert Solution

Rahul Sunny answered 8 months ago

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