1. Suppose that the total aggregate supply of workers is inelastic (constant), with the aggregate supply...

1. Suppose that the total aggregate supply of workers is inelastic (constant), with the aggregate supply curve (all sectors combined) given by L^S=100 workers. Suppose there are two industries/sectors with labour demand L_A=120-w_A in sector A and labour demand L_B=100-w_B in sector B.

Find the aggregate labour demand function L^D(w) of both industries/sectors combined, assuming they pay the same wage w_A=w_B=w
Calculate the aggregate competitive equilibrium outcome (wage and employment level) when both industries/sectors pay the same wage w_A=w_B=w
At the equilibrium wage, how many workers will work in sector A and how many workers will work in sector B?
Draw the demand function in each sector (on two graphs). Label the equilibrium wage and number of workers in each sector.

2. Now (for the same setup as Problem 1) suppose sector A forms a union and bargains for wage w_A=30.

What is the quantity of labour demanded in sector A after the wage increase?
How many workers from sector A will now have to look for employment in sector B?
How many workers will be in sector B after these workers join? What wage will be paid in sector B now?
For sectors A and B, compare the wage and employment level outcomes versus in Problem 1.
What is the observed union—non-union wage differential d̂_obs?
What is the pure (direct) union—non-union wage differential d̂_dir (caused by the union directly)?
Which differential is greater, and why?

Edit: That's exactly what our prof gave us I'm confused as well :(

Expert Solution

Rahul Sunny answered 5 months ago

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