Question 1
Consider a competitive labor market in which all jobs are full-time and paid on a daily basis, and the daily labor demand and labor supply functions are given by:
LD = 5000 -15W W is the (daily) wage per worker
LS = -1000 + 45W LD and LS are measured in it of workers
(a) What is the competitive equilibrium daily wage in this market? W* =
(b) What is the competitive equilibrium level of employment? L* =
(c) Suppose that a wage floor (minimum wage) is set at $110/day. Now what is the competitive equilibrium level of employment in this market?
How many workers lose their jobs?
How many people are unemployed?
(d) Now consider how the effects of a minimum wage on job loss and unemployment would differ under each of the following conditions. Unless stated otherwise, assume that Los and Ls are as given above and that the minimum wage is $1 l0/day. You should not need to make any new calculations, but it may help to sketch a graph. (Record your answers in the table; explanations not required.)
#jobs lost # unemployed
(1) Labor supply is perfectly inelastic
(2) Labor demand is perfectly inelastic
(3) The minimum wage is $80/day
Question 2:
The native labor supply (SN) and demand for labor (D) are as shown in the graph below.
The native labor supply function is given by: LsN = 20 + 2W
The demand for labor is given by the function: LD = 80 - 10w
Consider the effect of an influx of immigrants whose labor supply is perfectly inelastic at Ls1 =18.
(a) Sketch the supply curve for immigrant labor on the graph. Label it S1.
(b) Sketch the new total supply curve for labor on the graph. Label it S'.
(c) What is the new equilibrium wage W'? .Solve for it and label it on the graph.
(d) What is the new (total) equilibrium level of employment L'? .Solve/ label on graph.
(e) What is the new equilibrium level of employment of native workers L"? .Solve/ label.
(f) What is the change in employment of native workers? _
Now suppose that the demand for labor were perfectly elastic at the original equilibrium wage:
(g) What would be the new post-immigration equilibrium wage?
(h) Now what is the change in employment of native workers due to immigration?
Question 3
Chicken Hut dinner. The faces a perfectly elastic demand for chicken dinners at the market price of $6 per Hut also faces an upward-sloping labor supply curve, given by:
L = 20w - 120 or w= 6 +.05L
where L is the hourly supply of labor and w is the hourly wage rate.
The marginal product of labor in chicken dinner production is diminishing in L and is given by the function:
MPL = 5 - .01L
The cost of non-labor inputs for each chicken dinner is $0 as the Hut receives two-day-old chickens from Hormel for free.
(a) Briefly explain why Chicken Hut could have some monopsony power in the labor market (i.e. face an upward-sloping labor supply curve) even if there are many other firms in the same city who employ workers of the same skill level as Chicken Hut does.
(b) How many workers will Chicken but hire each hour in order to maximize profits? (show work):
(c) What wage will the Hut pay? (show work):
The graph below shows Chicken Hut's labor supply curve and its marginal revenue product of labor curve.
(d) Use the graph to derive and confirm your answers to parts (b) and (c). Label the firm's otimal (monopsony) level of employm p
ent Lms* and its optimal monopsony wage Wens*.
(e) Suppose that a minimum wage of $15 is imposed in this market. How does this affect the Hut's optimal level of employment? Use the graph to derive the new level of employment and label it L'.
