Labor in Boom and Recession.
Assume there is a labor force of 16 workers at an isolated site. During boom the firm faces a demand curve of P=100-Q. During recession it faces a curve of 80-2Q. Like likelihoods of Boom and Recession are 60% and 40%, respectively.
How many workers are employed in boom, how many during recession? What are the corresponding wages? Calculate the consumer surplus of the firm in boom and in recession. What is the expected surplus?
Now assume a large cluster where the labor supply is infinitely elastic.
Assuming the same demand curves and the same Boom-Recession likelihoods as in the Question above and the average wage of the isolated site (also from the Question above), how many workers are employed in boom? How many are employed during recession? What are the corresponding wages? Calculate the consumer surplus of the firm in boom and in recession. What is the expected surplus?