9. A increase in the demand for beer causes the price of beer to rise. Draw...

9. A increase in the demand for beer causes the price of beer to rise. Draw a diagram showing how this will a↵ect the market for brewers. Explain what happens to their employment, wages, and marginal product of labour. How does you answer depend on the elasticity of brewers’ labour supply?

Expert Solution

An increase in the demand for beer will shift the demand curve to the right, raising the price of beer and its quantity sold.

Now this beer is prepared by brewers so that in the market for brewers, we expect that there is an increase in the demand for brewers. This happens because demand is the product of marginal product of labor (brewer) and the price of beer. Since price of beer has increased, it means marginal revenue product (demand curve for labor) increases.

This increases their employment as well as their wages. However, there is no change in skill or technology so the marginal product of labour remains same.

The answer depend on the elasticity of brewers’ labour supply. If labor supply is highly elastic,the resultant shift raises employment more than it raises wage rate in percentage terms. Similarly. when labor supply is highly inelastic,the resultant shift raises employment slightly than it raises wage rate in percentage terms

Rahul Sunny answered 1 month ago

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