Question

Suppose the labor market can be described by the following: Labour demand: LD = 880 – 50W, where W = wage per hour Labour supply: LS = 40W – 200 The initial equilibrium wage is $12 per hour and the level of employment is 280. Suppose firms are paying their worker $15 per hour, find a change in the level of unemployment. Answer: For numerical answers, just enter the numbers (i.e., no unit of measurement, no comma). For example, if profit= – $5,125.6, just enter "–5125.6" in the answer box No space between the negative sign and the number. DO NOT enter "– $5125.6" or "– 5,125.6" or "profit = –5,125.6" etc; otherwise, the system will mark you wrong & you won't receive marks. Change in the level of unemployment =

Answer 1

Labor demand is as follows -

LD = 880 - 50W

Labor supply is as follows -

LS = 40W - 200

The initial equilibrium wage is $12 per hour and 280 workers are employed.

Since, initially, labor market is in equilibrium and, at equilibrium, quantity demanded of labor equals the quantity supplied of labor, there is no unemployment.

So, initially, there is 0 unemployed workers.

Now,

The firms start paying wages of $15 per hour.

Labor demand, LD = 880 - 50W = 880 - (50 * 15) = 880 - 750 = 130

At wage rate of $15 per hour, 130 workers are demanded.

Labor supply, LS = 40W - 200 = (40 * 15) - 200 = 600 - 200 = 400

At wage rate of $15 per hour, the labor supply is 400 workers.

When at a wage rate, labor demand is not equal to labor supply then lower of the two is labor employed.

So, at wage rate of $15 per hour, 130 workers are employed.

The number of employed has decreased from 280 workers to 130 workers. This means 150 workers have become unemployed.

So,

The change in the level of unemployment is 150 workers.