Question

Question 1:

The labor supply curve is given by:  E_S =  40w

The labor demand curve is given by: E_D = 1800 - 20W

1.a) At what wage W* and employment level E* will the market be in equilibrium?

1.b) On the graph below, draw the supply curve (label it S), the demand curve (label it D). Indicate clearly where each curve intersects the horizontal and vertical axis. On your graph, clearly indicate where equilibrium price W* and quantity E* are.

Now suppose that a minimum wage of $40 was put in place by the state governmnt.

1.c) How much labor is supplied E_s and what is labor demand E_D? Is there a shortage or a surplus?

1.d) How many workers will be employed at this minimum wage?

1.e) Is there any unemployment? It yes, how much?

Now suppose that the price of the product sold by the firms in this market changes, and that the demand for labor becomes: E'_D = 1200 - 20W

1.f) Did the labor demand curve shift up or down?

1.g) Did the price of the firms' product increase or decrease?

Answer 1

1) A) ED = ES

1800 - 20W = 40W

1800= 60W

W = 30

ES = 40W = 40 . 30 = 1200

Therefore E* = 1200

C) Minimum wage = 40

ES = 40.40 = 1600

ED = 1800- 20.40 = 1800 - 800 = 1000

As , ES > ED so there is surplus

d) At minimum wage of 40 there would be 1000 workers employed .

e) Yes there is unemployement of E* - ED = 1200 - 1000 = 200

F) Labour demand curve shifts down when ED = 1200 - 20W

G) price of the product increases .