ProblemSet2-AK

# ProblemSet2-AK - Economics 3203 Fall 2010 Problem Set 2...

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Economics 3203 –Fall 2010 Problem Set # 2: Labor Demand (1) ANSWER KEY 1. a. To solve for the market equilibrium, we want to set labor supply equal to labor demand. We can graph these: W 100 S 80 D 40 20 L Combine with the labor supply curve and solve: 40 + 2L = 100 - L L = 20 Plug L = 20 into either curve to get W = 80 Solution: W = \$80/day, L = 20,000 workers (L = 20 is acceptable, but please be careful about units) b. W 100 S W E = 85 80 W W = 70 D D’ 40 15 20 L The equation for the new demand curve is W = 100 – L -15, or W = 85 - 15. (this is the old demand curve shifted down by the tax of 15). The new equilibrium is at the intersection of the new demand curve (D’) and the supply curve, where (W W ,L) = (\$70, 15). Employers must pay workers the wage, \$70, plus must pay the tax, so their total expenses per worker-hour are W E = \$70 + \$15= \$85. 1

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c . 2/3. This is because workers have taken a \$10/day pay cut while employers are paying only \$5/day more than before. If the demand curve were steeper (more inelastic) or the supply curve were flatter (more elastic), the worker would bear less of the burden. d. (There is no single correct answer; the following is one possible response) Workers may support it if they will benefit (directly or indirectly) from the government’s use of the tax money; the same is true for firms. As an example of an indirect benefit, the tax money could be spent in some way that improves the quality of life for the community, such as in building a new road, playground, or nature preserve. 2. Scale effect: total output, and therefore total employment, will decrease because of an increase in labor (production) costs. This means a decrease in the number of student workers AND in the number of baristas Substitution effect: Since student workers and baristas are somewhat substitutable, we expect the shop to substitute away from student workers so that they can hire more of the (now relatively cheaper) baristas.
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