Question

The market for waiters is defined by the following demand and supply curves:
w = 20 − 0.2ED (Demand)

w = 13 + 0.1ES (Supply)

a) Graph the demand and supply curves. Make sure the wage w is on the y-axis and employment E is on the x-axis. On the graph, indicate where the equilibrium wage and employment level would be by denoting them w∗ and E∗, respectively.

b) Solve for equilibrium wage and employment.
Now, suppose the industry buys more robots who can wait tables, which substitute for the labor of waiters.

Restaurants’ demand for waiters decline. The new demand function is given by
w = 20 − 0.4ED (Demand’)

c) Will equilibrium wage increase, decrease, or stay the same? State the economic intuition behind your answer. (Note: You will not have to solve for equilibrium wage to answer this question.)

d) Will equilibrium employment increase, decrease, or stay the same? State the economic intuition behind your answer. (Note: You will not have to solve for equilibrium employment to answer this question.)

e) On a separate graph, plot the new demand curve, the old demand curve, and the supply curve. Indicate where the new equilibrium wage and employment level would be by denoting them w′ and E′, respectively.

f) Solve for the new equilibrium wage and employment.

Answer 1