Question

Assume the wage in a cluster location is equal to w=$120. Labor demand curves are given by w_BOOM=180-L and w_BUST=100-2L, where L denotes the number of jobs.

1) Calculate the number of employed workers in both situations (Boom, Bust)

A) 120;0 B) 60;-10 C) 180;20 D) None of these

2) What is the expected CS if the likelihood of boom is 90%?

A)0 B)1800 C) 100 D) None of the above

Answer 1

wBOOM=180-L and wBUST=100-2L, where L denotes the number of jobs.

wage in a cluster location is equal to w=$120.

1) Calculate the number of employed workers in both situations (Boom, Bust)

Putting wage= 120 in both the equation of bust and boom

Boom:

120 = 180 - L

Lboom = 180-120 = 60

Bust:

120 = 100 - 2L

2L = 100 - 120 = -20

Lbust = -10

SO in boom labour employed will be 60 and in bust labour employed will be -10, so the answer is b) 60, -10

..

2) What is the expected CS if the likelihood of boom is 90%?

Consumer surplus in a factor market is the difference between maximum acceptable factor price and the actual factor price for all units purchased.

Maximum wage when labour employed is 0 in boom

= 180

CS in boom = 0.5 * (180-120) * 60 (using formula of a right angle triangle, base = 180-120, height = labour employed = 60

CS in boom = 0.5 * (180-120) * 60 = 1800

Maximum wage when labour employed is 0 in bust

= 100

CS in bust = 0.5 * (100-120) * -10 (using formula of a right angle triangle, base = 100-120, height = labour employed = -10

CS in boom = 0.5 * (100-120) * -10= 100

likelihood of boom is 90%

expected CS = 0.9* 1800 + 0.1 *100

expected CS = 1620 + 10 = 1630

So the answer is d) none of the above.