Problem Set 5 Economics 151a Winter 2010 Due: Tuesday, 2/16/10, 12:10 pm 1. Suppose that supply and demand for labor in a particular industry are given by (E is employment and w is the hourly wage: E s = 10 + w E d = 40 – 4w a. Find the equilibrium wage and employment levels if the labor market is perfectly competitive. What is the unemployment rate? (Assume there is no mobility to/from other sectors.) b. If the government sets a minimum wage of $8 in this industry, how many workers will lose jobs? What is the unemployment rate that results from imposition of the minimum wage? c. What is the elasticity of labor demand at the initial equilibrium wage? What does the elasticity suggest will happen to the number of workers hired in this industry if we increase the wage by 33%? Compare this answer to the change in workers hired from part B. Why is there typically not such an exact correspondence between the minimum wage and the elasticity of labor demand? 2.
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