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econ151a_ps7_w2010 - Problem Set 7 Economics 151a Winter...

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Problem Set 7 Economics 151a Winter 2010, Due 3/2/10, 12:10 pm 1. Suppose that a large influx of immigrants enters a local area, increasing the labor supply in the local labor market. a. If immigrant and native workers are perfect substitutes for one another, what do we predict will happen to wages in the short-run (holding capital fixed). Use a supply and demand diagram to support your answer. b. How does economic theory suggest this effect of immigration will change in the long-run when labor is mobile across areas, and capital is adjustable? Be explicit about what causes wages, capital prices, and factor supplies (of both labor and capital) to change. c. Suppose that there is a minimum wage in the market, set just below the equilibrium wage that prevailed BEFORE the influx of immigrants. Show and explain the effect of immigration in the presence of a minimum wage in the short-run. How do you think the presence of a minimum wage would affect the long-run adjustment of capital? (Think about the way that
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