Course: Introduction to Economics - Labor Market

PD: THIS EXERCISE ALREADY BEEN ANSWERED BY ANOTHER TUTOR, BUT ANSWER IS TOTALLY WRONG. PLEASE ANSWER ACCORDING QUESTIONS A), B) AND C). THANKS:D You've been asked to solve an analytical example to illustrate concretely effects of minimum wage and labor income tax legislation on employment and, therefore, unemployment. For this, you have decided to study Labor Demand of a firm whose production function is given by: Y = AK^1/3K^2/3 For simplicity, you decide to assume that A = P = K = 1 , where A is factor productivity, P is price of the good sold by firm and K is amount of capital hired by firm. Recall, moreover, that optimal decision of any economic agent can be reduced to an equality between marginal revenue and marginal costs. In particular, firm will hire workers up to a point where marginal revenue (MR) of their labor equals marginal cost (MC). Given production function you have decided to use for analysis, marginal productivity (MPL) of labor is given by: MPL = 2/3L^-1/3 Suppose, further, that supply of labor is monotonic and increasing in wage: L^s = w²

a) In first instance, describe how labor market behaves in this economy if there is no market regulation. Determine WAGE, EMPLOYMENT and UNEMPLOYMENT. b) Now consider effects of introducing a minimum wage (w_m). What's EMPLOYMENT and UNEMPLOYMENT RATES if w_m = 1? What if w_m = 0.5? How does this market differ from the one described in a)? Suppose, further, that government has an unemployment insurance policy of w_g = 0.2. In this context, how much would an unemployed person be willing to pay a recruiter to get a job? c) Finally, consider impact of introducing a 5% wage tax (this tax has legal incidence on employers). Calculate EMPLOYMENT and UNEMPLOYMENT RATES when w_m = 0 and w_m = 1. [Help: if w is the wage received by a female worker, cost (to employer) of hiring her is w*1.05].