Question

In this problem we will express labor demand and supply as mathematical equations. Assume labor supply and labor demand are described by the following? equations:

L^S= 5 x w (Labor supply)

L^D= 110-0.5 x w (Labor demand)

where w? = wage expressed in dollars per hour and L^S and L^D are expresses in millions of workes.

Solve these equations for the wage and level of employment at which labor demand and labor supply are equal. The equilibrium wage is $____ and the level of employment is ____million workers.(Enter reponses as integers)

Now assume labor demand shifts to the? left, so that it can now be described by this? equation:

L^D= 55 -0.5 x W

If wages are? flexible, the new equilibrium wage is $___and the level of employment is ___million workers.(Enter your responses as integers?.)

Now assume that wages are rigid at? $20 per hour. Employment will be determined by the quantity on the labor demand? curve, but it will not equal the total number who would like to work at that wage.

Employment at? $20 per hour is ____ million workers, and there are ___million workers unemployed.(Enter your responses as integers?.)

Answer 1

(a) Ls= 5w (Labor supply)

Ld= 110-0.5w (Labor demand)

at equilibrium Ls=Ld So 5w=110-0.5w, Solving for w we get the equilibrium wage w=20 and equilibrium employment L=5*20=100

(b) The new Labor demand curve is Ld= 55 -0.5W

At equilibrium Ls=Ld So 5w=55-0.5w, Solving for w we get the equilibrium wage w=10 and the equilibrium employment L=5*10=50

(c) Now assume that wages are rigid at? $20 per hour, at this wage Ld=55-0.5*20=45 and so employment=L=45, At this wage, Ls=5*20=100, So Unemployment=Ls at $20 - Ld at $20 = 100-45=55