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Problem 1: Labor Market Equilibrium (20 pts) The market for hair dressers in Michigan is given by the following demand and supply curves 1 w
Problem 1: Labor Market Equilibrium (20 pts) The market for hair dressers in Michigan is given by the following demand and supply curves 1 w 2 30 L5ED (Labor Demand) 1 S w = 10 + 20E (Labor Supply) a. Graph the labor demand and supply curves with E on the x-axis and w on the y-axis. Label the demand curve ED and the supply curve ES. (4 pts) b. Solve for the equilibrium employment and wage in this labor market. Label it (E0,w0) on the graph from part a. (5 pts) Suppose that demand for hair dressers rises as people return to in-person work: compared to before, cus tomers are willing to pay more for the same amount of work. The new demand function is l w = 40 BED, (Labor Demand') c. Solve for the new equilibrium employment and wage in this labor market, (E*, 10*). (5 pts) (1. Graph the new demand function on the same graph from part a. Label the new equilibrium (E*, 111*). (3 pts) e. Does equilibrium employment increase, decrease, or stay the same? Does equilibrium wage increase, decrease, or stay the same? State the economic intuition behind your answer. (3 pts)
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