Consider a two-sector economy with homogeneous labour and jobs in both sectors. Two million workers supply their labour perfectly in-elastically. Labour demand in both sectors can be written as: E1 = 1,800,000 - 100,000w1 and E2 = 1,800,000 - 100,000w2.

(a) If both sectors are competitive, what is the market-clearly wage and how many workers are employed in both sectors?

(b) Suppose a labour union forms in sector

1. The union negotiates a wage of $12 per hour, and firms choose how much labour to employ. Anyone not employed in sector 1 is relegated to sector

2. How many workers will be employed in sector 1 (unionized)? How many workers will be employed in sector 2, and what wage will they receive?

(c) What is the union-wage gap in part (b)? What would the union-wage effect be if one controlled for the spillover effect?