A what effect does this employer mandate have on the

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a. What effect does this employer mandate have on the demand for labor? (In answering this and the following questions, be quantitative when you can.) Answer: If a firm was not providing such benefits prior to the legislation, the curve showing the demand for labor would shift down by exactly $4 at each quantity of labor, because the firm would not be willing to pay as high a wage given the increased cost of the benefits. b. If employees place a value on this benefit exactly equal to its cost, what effect does this employer mandate have on the supply of labor? Answer: If employees value the benefit by exactly $4 per hour, they would be willing to work the same amount for a wage that’s $4 less per hour, so the supply curve of labor shifts down by exactly $4. c. If the wage is free to balance supply and demand, how does this law affect the wage and the level of employment? Are employees better or worse off? Are employers better or worse off? 4
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Answer: Figure below shows the equilibrium in the labor market. Because the demand and supply curves of labor both shift down by $4, the equilibrium quantity of labor is unchanged and the wage rate declines by $4. Both employees and employers are just as well off as before. d. Suppose that, before the mandate, the wage in this market was $3 above the minimum wage. In this case, how does the employer mandate affect the wage, the level of employment and the level of unemployment? Answer: If the minimum wage prevents the wage from falling, the result will be increased unemploy- ment, as the figure below shows. Initially, the equilibrium quantity of labor is L 1 and the equilibrium wage is w 1 , which is $3 lower than the minimum wage w m . After the law is passed, demand falls to D 2 and supply rises to S 2 . Because of the minimum wage, the quantity of labor demanded ( L D 2 ) will be smaller than the quantity supplied ( L S 2 ). Thus, there will be unemployment equal to L S 2 - L D 2 . e. Now suppose that workers do not value the mandated benefit at all. How does this alternative assumption change your answers to b) and c)? Answer: If the workers do not value the mandated benefit at all, the supply curve of labor does not 5
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shift down. As a result, the wage rate will decline by less than $4 and the equilibrium quantity of labor will decline, as shown in the figure below. Employers are worse off, because they now pay a greater total wage plus benefits for fewer workers. Employees are worse off, because they get a lower wage and fewer are employed. Question 6: CPI and Inflation The Bureau of Labor Statistics reported the following CPI data: June 2006: 201.9 June 2007: 207.2 June 2008: 217.4 a. What do these numbers tell you about the price level in these three years? Answer: The price level rose each year from 2006 to 2008. b. Calculate the inflation rates for the years ended June 2007 and June 2008. Answer: The inflation rate for the year ended June 2007 was (207.2-201.9)/201.9x100=2.63%. The inflation rate for the year ended June 2007 was (217.4-207.2)/207.2x100=4.92%. c. How did the inflation rate change in 2008?
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