1) Suppose that Labor Supply is linear with exactly 0M people willing to work at a...

1) Suppose that Labor Supply is linear with exactly 0M people willing to work at a wage of $0 and 5M more people willing to work for each $1 increase in the wage. Labor Demand was such that the equilibrium wage rate was $20. Suppose that a negative shock hits labor demand so that the new [inverse] Labor Demand Curve has a vertical intercept at 110M and slope of -0.5. If downward wage rigidity prevents the wage from falling below $20, then how many people will be unemployed?

2) Consider the scenario in Question 1. Suppose that the shock to labor demand affected only the labor demand curve's intercept and not its slope. What must have been the pre-shock intercept for labor demand in order for $20 to be the equilibrium wage?

Expert Solution

Q1. 30 million people will be unemployed as a result of negative shock.

Rahul Sunny answered 7 months ago

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