Consider the following labor market, summarized by the equations below:

Labor demand: LD=aD-w

Labor supply: LS=aS+2w

where w is the wage, L is the number of workers, aD and aS are constants. LD stands for labor demanded and LS by labor supplied.

Suppose that aD=100,000 and aS=10,000.

Draw the demand-supply diagram and label the equilibrium point A. Label also the corresponding wage (wA) and the corresponding employment (LA).

Q. The equilibrium wage (wA) is

55,000

30,000

22,000

20,000

Q. The equilibrium employment (LA) is

70,000

45,000

20,000

42,000

Business owners predict low sales next year, so they reduce hiring. As a result, aD=70,000 and aS=10,000.

Draw the demand-supply diagram and label the equilibrium point B. Label also the corresponding wage (wB) and the corresponding employment (LB).

Q. The expected drop in sales will make...

the labor demand shift to the left.

the labor supply shift to the right.

the labor demand shift to the right.

the labor supply shift to the left.

Q. The equilibrium wage will be

20,000

30,000

33,000

22,000

Q. The equilibrium employment will be

40,000

75,000

30,000

50,000

As above, suppose that business owners predict low sales next year so they reduce hiring and as a result, aD=70,000 and aS=10,000. But in this scenario wages are TOTALLY RIGID and cannot adjust this year. Draw a diagram and label the equilibrium point C (with wage wC and employment LC). Recall that wages are kept fixed at the initial level

Q. What is the level of employment?

80,000

70,000

22,000

40,000

Q. What is the unemployment rate? Pick the closest value. Recall that UR=U/LF.

4.3%

43%

25%

2.5%