Consider a simple model of the labour market, characterised by a downward-sloping labour

demand curve and an upward sloping wage-setting curve in the NW/P- plane, whereNisthe number of employed workers andW/P

the real wage. Labour demand is a linear functionofNand given byWP= 1400.5N.

Wage setting is given by

WP= 44 + 0.5N.

a. Suppose that the labour force, L, comprises 100 workers. Illustrate the equilibrium in a

diagram and compute employment, unemployment and the market-clearing real wage.

b. Starting from the equilibrium in a, suppose that the government introduces a minimum

wage corresponding to a real wage of 95. Illustrate the effects of the reform in a diagram.

How high is the unemployment rate under the minimum wage?