Question

Problem #4: Own-price elasticity Suppose the market labor demand curve is given by LD 20- (1/2)W and the market labor supply curve is given by LS-2W 1. Graph the labor demand curve and the labor supply curve on the same graph (with L on the horizontal axis and W on the vertical axis, as we have done in class). 2. Determine the equilibrium employment (L") and wage (W") in this market. Now suppose the government implements a minimum wage (WM) of $10 in this market. What will the new level of employment be? 4. Calculate the elasticity of the labor demand curve when the wage changes from its equi- librium level (W") to the minimum level (WM) set by the government. Is the demand curve elastic or inelastic in this range? 5. Suppose that the wage in some other labor market goes up so that labor supply in this market is now given by LS 2W-10. Graph the new supply curve on your graph from Part #1. 6. Now that supply has shifted, what will employment and the wage paid to workers be in this market? What is the effect of the minimum wage given in Part #3 on employment now? 7. The government implements a new minimum wage of $14 in this market. What will the new level of employment be? Calculate the elasticity of the labor demand curve when the wage changes from what it is in Part #6 to the new minimum wage of $14. Is the demand curve more or less elastic in this range than it is in Part #4?

Answer 1

CnINen that U) plo tting the to curve we get twag au anti t 2) Euilbvium is at point csheve labour demandw the Labour Supply Ld=L5 (s)when - Sia then the de mand For la bour nd the labour Supplywould be LS2lo2ounits hus there ube a Supsu in the mavket a Suplusơf labour S |n the market