In the short run one half of the labour force has high skills and one half low skills (in terms of Figure 13.2 this means that the short-run supply curve is vertical at 0.5). The relative demand for the high-skill workers is given by W = 100×0.4×(1- f), where W is the wage premium and f is the fraction that is skilled. The premium is measured in percent.
(a) Illustrate the supply and demand curves graphically, and compute the skill premium going to the high-skill workers in the short run by solving the two equations.
(b) If demand increases to W = 100 × 0.6 × (1 - f) what is the new premium? Illustrate your answer graphically.
