Mr. Mullet runs a traveling carnival that hires local workers in each city it visits. The demand for carnival activities is uncertain, with low or high demand equally likely many given city. At the end of the year, Mr. Mullet reviews his financial records and discovers some puzzling differences between his experiences in small and large cities. 1. He always paid the same wage in large cities ($9), but paid different wages in small cities ($6 or $12) ii. He always hired the same quantity of labor in small cities (20 workers), but different quantities in big cities (10 or 30 workers)

(a) Using Figure 3-2 as a model, illustrate with two graphs, one for the typical small city and one for the typical big city. Assume that the demand curves for labor are linear and parallel, with vertical intercepts of $18 (high demand) and $12 (low demand). Please label your

graphs, lines, axes, etc.

(b) In the typical big city with high demand, profit is Show your work. computed as.....

(c) In the typical big city with low demand, profit is

(d) In the typical small city with high demand, profit is

(e) In the typical small city with low demand, profit is

(f) in a big city, compared to in a small city. The expected profit is Show your work.

2. Clustering to Share a Labor Pool FIGURE 3-3 Clustering to Share a Labor Pool A: Isolated Site B: Cluster with Many Firms . Varying demand for each firm: Software & 24 a Supply TV programs 24 a Fixed industry-wide demand: zero-sum 16 changes in demand across firms 12 10 d Supply Locational equilibrium: High demand High demand Wage in cluster = 4 expected wage in Low demand isolated site = $10 Low demand 12 3 21 Number of workers Number of workers In an isolated site, the firm faces a perfectly inelastic supply of labor (12 workers). The firm In a cluster, the firm faces a perfectly elastic sup- hires the same number of workers during high ply of labor, and the wage is fixed at $10. The demand and low demand but pays a higher wage firm hires 21 workers during high demand but during high demand. only three workers during low demand. URBAN ECONOMICS 3-7