Without any change in the supply of labor, how are the following events likely to change...

Without any change in the supply of labor, how are the following events likely to change the equilibrium wage and employment level in a firm that manufactures umbrellas?

(a) A forecast of higher rainfall this year

(b) A decrease in the price of raincoats

Solutions

Expert Solution

(a) A forecast of higher rainfall this year

This forecast of higher rainfall this year would lead to increase in demand for umbrellas.

This forecasted increase in demand for umbrellas will induce the firm making umbrellas to increase their production of umbrellas so that they would be able to meet the expected increase in demand.

As they will increase their production, they will hire more labor.

So, demand for labor will increase.

Given the supply of labor, this increase in demand for labor will increase the equilibrium wage and employment level in a firm that manufactures umbrellas.

(b) A decrease in the price of raincoats

Raincoats are substitute of umbrellas. A decrease in price of substitute decreases the demand for given good.

So, decrease in the price of raincoats will decrease the demand for umbrellas.

This decrease in demand for umbrellas will compel the firms making umbrellas to reduce their production.

As firms will reduce production, they will also reduce the demand for labor as well.

Given the supply of labor, this decrease in demand for labor will decrease the equilibrium wage and employment level in a firm that manufactures umbrellas.

This labor-saving technology will prompt the firm to hire less labor.

So, demand for labor will decrease.

Given the supply of labor, this decrease in demand for labor will decrease the equilibrium wage and employment level in a firm that manufactures umbrellas.

Rahul Sunny answered 1 year ago

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