In: Economics
Suppose demand for and supply of labour in Australia are
Demand: LD = 2000 – 50W
Supply: LS = 1000 + 50W,
where, Demand and Supply are expressed in total hours worked per
week, and W = hourly wage rate (dollars per hour).
a) What would be the equilibrium hourly wage rate and quantity of labour employed in the absence of any government intervention in the market?
b) At the market equilibrium, what are the elasticities of
labour demand and supply?
c) Suppose that the Australian government introduces a wage subsidy
of $2 per hour for workers. What will be the effect on the market
outcome?
d) Draw a graph to illustrate your answers to parts a) and c).
A) Without government intervention, equilibrium occurs where demand equals supply.
LD=LS
2000-50W=1000+50W
1000=100W
Equilibrium wage W*= 10
Equilibrium labor L*=2000-50*10= 1500
B) Elasticity of labor demand= (dLD/dW)(W*/L*)= -50*(10/1500)= -0.33
Elasticity of labor supply= (dLS/dW)(W*/L*)= 50*(10/1500)= 0.33
C) wage subsidy= Wage received by workers- Wage paid by employers= $2.
New labor supply LS'= 1000+50(W+2)= 1000+50W+100=1100+50W
New equilibrium
LS'=LD
1100+50W=2000-50W
100W=900
Wage paid by employers W*= $9
Wage received by workers= $9+$2=$11
Equilibrium Quantity of labor= 2000-50*9= 1550
D)