Assignment Task: Draw Graphs and show your calculations in answering these questions.
Answer each question with sentences. The demand for labor in Tucson is characterized by the following equation: W = 12 - q/100,000,
Where W is the wage and q is the quantity of hours demanded by employers. Workers are willing to supply hours of work based on the following equation:
W = 4 + q/100,000.
Make sure to show your work and write sentences for your answers.
Part 1: If the wage is uncontrolled,
a. What will be the market wage and the market hours of work employed?
b. Show graphically the gains from trade to the employers who are the demanders of labor and the gains from trade to the workers who are the suppliers of labor. (Throughout the problem you can use letters to signify areas on the graph that show the gains from trade).
Part 2: If an effective and perfectly enforced minimum wage were established at $10,
c. How many hours would workers be willing to supply at that wage?
d. How many hours of work would be demanded by employers?
Part 3: Given the surplus of workers in b., we have to find a way to allocate hours of work. The city decrees that employers must hire the workers with the lowest opportunity cost for hours worked first (those offering to work on the lower left part of the supply curve). Using a graph, compare the gains from trade under the uncontrolled situation and the minimum wage situation for the following groups:
e. Employers who are still hiring workers.
f. Employers who are no longer hiring.
g. Workers who are still employed.
h. Workers who are no longer employed.
i. In which situation(s) is there a deadweight loss and how large is it?
Part 4: It turns out that the city of Tucson cannot enforce the minimum wage very well and they cannot tell employers whom to hire. An underground market for jobs develops. The city has limited resources for enforcement, so that they can only catch employers in the underground market one hour out of every 100 hours that the employer cheats on the minimum wage. The fine for 1 hour of cheating is $100. Therefore, the expected fine the employer will pay is $1 per hour. The expected fine reduces what the employer is willing to pay to the worker in the underground market by $1 at every level of quantity demanded. If the employers all move underground,
j. What is the wage that workers will receive for their work?
k. How many hours of work will be transacted?
l. What is the per-hour cost paid by the employer for an hour of work after the expected fine is included?
m. Compare the size of the deadweight loss under the "cheating equilibrium" and under the situation described in Part 3.
Part 5:
n. In most situations, employers are not so blatant about cheating on the law. Instead of breaking the law directly, they change working conditions and may change their hiring patterns. Give examples of the kinds of changes you might expect employers to make.