7) Use the labor market model to analyze the following event: Starting from an initial equilibrium real wage, employment and unemployment levels, suppose there is an increase in the labor supply (e.g. due to an increase in immigration).

a) What is the initial impact on the unemployment rate, the expected duration of unemployment and hence the cost of job loss? How does this shift the wage setting curve?

b) Given your answer to part a) draw the labor market graph (wage setting and price setting curves) and discuss how the economy adjusts to a new long run equilibrium.

c) Given your answer to part b) draw the real profit rate graph and show what happens to the real profit rate and the number of firms as the economy makes the transition from the initial to the new equilibrium. Explain fully!