Question

In: Economics

The demand for labor in a domestic industry is D = 36 – 2W, where W...

The demand for labor in a domestic industry is D = 36 – 2W, where W = the wage rate and D = the number (in thousands) of employees whom the firms would be interested in hiring at

particular wage rates. Sdomestic = 9 + W, where Sdomestic = the number (in thousands) of native workers who are interested in working in the industry at particular wages. Stotal = 10 + 2W, where Stotal is the total number (including immigrants) of workers who are interested in working in the industry at particular wages.

a. Graph the following curves for this labor market: demand for labor, domestic supply, supply

of immigrant workers, and total supply of workers.

b. What is the equilibrium wage rate before immigration? How many workers would be hired?

What is the total payments to workers? What is the total payments to capital owners (if

capital and labor are the only factors of production used in this industry?

c. What is the equilibrium wage rate after immigration? How many workers would be hired?

How many domestic workers would be hired? How many immigrant workers would be

hired? Calculate the new total payments to labor and capital owners.

Expert Solution

a).

Consider the given problem here the total supply of labor is “ST = 10 + 2*W” and the supply of domestic labor is “SD = 9 + W”. So, the supply of immigrants is “SI = ST – SD”.

=> ST – SD = (10 + 2*W) - (9 + W) = 1 + W, => SI = 1+W.

The following fig shows the domestic demand for labor (LD), domestic supply of labor (SD), supply of immigrant labor (SI) and total supply of labor (ST).

b).

The demand for labor is “LD = 36 – 2*W” and the domestic supply of labor is “SD = 9+W”. So, at the equilibrium before the immigrant the following condition must hold.

=> LD = SD, => 36 – 2*W = 9+W, => W = 26/4 = 6.5, => W = 6.5 = equilibrium wage.

The equilibrium labor hired is “LD = SD = 18”.

Here the total wage payment is given by the area “W1OL1E1 = 9*18 = $162”. The total capital payment is given by the area “A1E1W1 = 0.5*18*(36-9) = $243”.

c).

After the immigration the total supply is “ST = 10 + 2*W”, => at the equilibrium the demand must be equal to supply.

=> LD = ST, => 36 – 2*W = 10+2*W, => 4*W = 26, => W = 26/4 = 6.5, => W2 = 6.5 = new equilibrium wage. The equilibrium labor hired is “LD = SD = 23”.

Here the supply of immigrant is “SI = 1+W = 1+6.5 = 7.5”.

Here the total wage payment is given by the area “W2OL2E2 = 6.5*23 = $149.5”. The total capital payment is given by the area “A1E2W2 = 0.5*23*(36-6.5) = $339.25”.

Rahul Sunny answered 2 years ago

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