Question

1. What is the primary spatial or urban factor underlying an upward sloping labor supply curve in an open urban model? Draw a picture showing a labor market equilibrium. Assume that growth controls are put in place at the current equilibrium where those controls prevent the construction of new housing, but the current level of housing is sufficient to support the current population of the region. Explain and show the effect of these controls on the labor market picture. Hint: For the last part, you must draw a new curve or show the change in the curve on the original picture. Be sure to label the new curve separately from the original labor supply curve.

Answer 1

The solution of this problem would be.........

7 The underlying factor behind an upward sloping labour supply curve is that the substitution effect is greater than the income effeat. substitution effects (SE) The real wage rate in the relative price of leisure which has to be given up for work. As real wage rate sises - leisure becomes expensive in terms of income for gone) - this induces individual to work more at higher wage satis Income effect LED Inercase in wage rate also increases the purchasing power of the individual this increasing consumption demand for all goods including Leisure. Note: When IEX SE backward Trote to when It e whebinding Labour supply stained] CA

Initial stage (Equilibrium at E Real Ls. wege rat سیراما LE L (Quantity At point E, the controls are placed. Now, due to controlo placed, the housing becomes expensive. (limited Over time population grows and housing becomes a seare resource hence expensive. People now need a higher income lend to be able to afford This, the people who cannot afford housing - Shift out of the area

supply) falls. Thus, for the arca's labour market L3 (Labour The is curre shifts to the left andcase dbecomece slieproces as individual is need a higher level of income to afford the housing facilities. They bill only come into the market when wage rate is high enough for Them to be able to afford howsin Post the certain level, there is a possibility that the new labour supply cure (Ls A may become backward bending (LsA" as once income livel rises above the affordibility threshold for housing facilities) depending on the consumers utility the IEDSE and the preferences, the it Y SE an become backward cuve might bending