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Unformatted text preview: Problem Set 2 Solutions ECON 401, Winter 2008 Problems 1. (2.15) According to Borjas (2003), immigration into the United States increased the labor supply of working men by 11.0% from 1980 to 2000 and reduced the wage of the average native worker by 3.2%. From these results, can we make any inferences about the elasticity of supply or demand? Which curve (or curves) changed, and why? Draw a supply and demand diagram to illustrate what happened. We would expect the supply curve to shift to the right as immigrants increased the supply of labor. We can approximate the elasticity of demand by % Q % P 11 / 3 . 2 = 3 . 4, which means that the demand for labor is elastic. It is important to note that the 11% shift in supply does not mean that the equilibrium quantity increases by 11%. Even though the equilibrium quantity will likely move by less than 11%, the demand elasticity will still be greater than 1, implying an elastic demand. The challenging part was intended to get you to think beyond the immediate effects outlined above. For example, it might also be the case that labor demand would increase. Because of the cheap availability of labor, firms may decide to shift into more labor-intensive production processes, thus increasing the demand for labor. Another reason why wages might not react very much to a shift in the supply curve comes from a New York Times article about Borjas and the impact of immigrants on wages: As Card likes to say, The demand curve also shifts out. Its jargon, but its profound. New workers add to the supply of labor, but since they consume products and services, they add to the demand for it as well. Just because Los Angeles is bigger than Bakersfield doesnt mean L.A. has more unemployed than Bakersfield, Card observes. In theory, if you added 10 percent to the population or even doubled it nothing about the labor mar- ket would change. Of course, it would take a little while for the economy to adjust. People would have to invest money and start some new businesses to hire all those newcomers. The point is, they would do it. Somebody would realize that the immigrants needed to eat and would open a restaurant; someone else would think to build them housing. Pretty soon there would be new jobs available in kitchens and on construction sites. And that has been going on since the first boat docked at Ellis Island 1 2 2. (2.18) What effect does a $ 1 specific tax have on equilibrium price and quantity, and what is the incidence on consumers, if a. the demand curve is perfectly inelastic? Throughout this problem we will be using Equation (2.28) to solve for the change in price as a result of the tax: dp d = - If the demand curve is perfectly inelastic, we have a vertical demand curve, which means that consumers will always demand the same amount of the good, regardless of the price....
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This note was uploaded on 04/09/2008 for the course ECON 401 taught by Professor Kuhn during the Winter '08 term at University of Michigan.
- Winter '08