Question

22. Consider a labor market where the demand for a particular category of labor is given by the equation LD = 20 – 2W. Suppose that the supply curve of workers in this market who are also native-born citizens is given by LN = 2W, while the supply curve of immigrants in this market is given by LI = W, where L represents the number of workers, W is the wage expressed in real terms, and the subscripts D, N, and I are used to distinguish between the quantity of labor demanded and the quantity of labor supplied by native-born and immigrant workers.

22a. Find the market-clearing wage and employment level assuming immigration is not allowed. Then find the market-clearing wage and employment level after allowing for immigration. How many native jobs are lost to immigrants?

22b. Compute the real income of native-born workers in this market before and after immigration. How much is the income flow reduced?

22c. Ignoring the cost of capital, compute the total profits of the firms before and after immigration. What is the change in total profits?

22d. Compute the total output of this market before and after immigration. How much total output does society gain because of immigration?

*22e. Taken as a whole, how much would immigrants be willing to pay in real terms for the right to work in this country (i.e., how much do immigrants earn in economic rent)?

*22f. If immigration leads to a large enough increase in output, it is possible that native workers can be kept at least as well off as before immigration without hurting immigrants or the firms. Give an example of a transfer payment scheme that would accomplish this.

22g. What other effects do immigrants have on labor markets that are not captured in this model?

Answer 1