Chap005Solutions - CHAPTER 5 5-1. Suppose the labor supply...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
29 CHAPTER 5 5-1. Suppose the labor supply curve is upward sloping and the labor demand curve is downward sloping. The study of economic trends over a particular time period reveals that the wage recently fell while employment levels rose. Which curve must have shifted and in which direction to produce this effect? If the supply curve does not shift, all wage and employment movements must occur along the supply curve, so that the wage rate and the employment level must move in the same direction. Because the wage went down while employment went up in the situation described in the question, it must have been the case that the supply curve shifted outwards (to the right). We do not have enough information to determine whether the demand curve shifted as well. 5-2. It takes time to produce a new economist, and prospective economists base their career decision by looking only at current wages across various professions. Further, the labor supply curve of economists is much more elastic than the labor demand curve. Suppose the market is now in equilibrium, but that the demand for economists suddenly rises because a new activist government in Washington wants to initiate many new programs that require the input of economists. Illustrate the trend in the employment and wages of economists as the market adjusts to this increase in demand. Initially, the market is in equilibrium at a wage w 0 and an employment level of E 0 . The increase the demand for economists results in a new equilibrium wage of w 1 and a new equilibrium employment level of E 1 . However, the demand for economists in the short-run is inelastic at E 0 , so the demand increase simply leads to a rise in the wage of economists (as indicated by point 1). In the next period, students believe this wage will persist and oversupply the market so that the cobweb leads to a new wage at point 2. In the next period, students undersupply (because the wage is too low) and the cobweb leads to a new wage at point 3, and so on. Because of the relative elasticities of supply and demand (as drawn), the cobweb is exploding and will never converge to a stable equilibrium.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
30 5-3. Suppose the supply curve of physicists is given by w = 10 + 5 E , while the demand curve is given by w = 50 – 3 E . Calculate the equilibrium wage and employment level. Suppose now that the demand for physicists increases and the new demand curve is given by w = 70 – 3 E . Assume this market is subject to cobwebs. Calculate the wage and employment level in each round as the wage and employment levels adjust to the demand shock. (Recall that each round occurs on the demand curve – when the firm posts a wage and hires workers). What is the new equilibrium wage and employment level? The initial equilibrium is given by 10 + 5
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/06/2008 for the course ECON 324 taught by Professor Hamermesh during the Spring '05 term at University of Texas at Austin.

Page1 / 8

Chap005Solutions - CHAPTER 5 5-1. Suppose the labor supply...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online