15. Labor Markets. .Suppose that the labor market in Chico, California, is in equilibrium, according to the Classical model, with an equilibrium wage of $12/hour.(For simplicity, let's assume everyone in Chico gets paid this wage.)

a) If the minimum wage in California is $10/hour, would there be any unemployment in Chico, or would the unemployment rate be zero?Briefly explain.

b) Suppose that the California economy suffers a large negative demand shock (due to the coronavirus pandemic, for example).Because of this labor demand shock, the long-run equilibrium wage in Chico is now $9/hour.What would we expect to happen to the unemployment rate in Chico in this case (assuming no other labor market distortions other than the minimum wage)?Draw a diagram to help explain your answer.

c) Suppose that, instead, California's economy suffers a smaller negative demand shock, which only pushes the long-run equilibrium wage in Chico down to $11/hour.Are there other labor market frictions that might affect the unemployment rate in this case?(You can assume that prices are fixed in this example, so that nominal wage frictions and real wage frictions are equivalent.)Briefly explain why, and use a diagram to help illustrate your answer.