ECON 223

Problem #2: Suppose there are two firms in a perfectly competitive industry: Firm 1 and Firm 2. The two firms' labour demand functions are given as the following: !=5030 "=6040 Answer the following questions: a) Calculate the labour demand of the market. (3 Marks) b) Suppose the labour supply of the market is: =20+50. Calculate the equilibrium wage rate. (3 Marks) c) Assume that the government starts taxing consumption of the outputs produced by this industry, which causes the quantity demanded for the product to decrease. As a derived

demand, the labour demand of Firm 1 and Firm 2 both decrease by 10%. Calculate the new labour demand of this market. (5 Marks) d) Calculate the new equilibrium wage rate with the effect of the tax. (3 Marks)