Production function

Labor market

Labor

hours

(per day)

Real GDP

(2009 dollars per year)

Real

wage rate

(2009 dollars per hour)

Quantity of

labor demanded

Quantity of labor supplied

0

0

(hours per day)

10

100

1.00

10

50

20

180

0.80

20

40

30

240

0.60

30

30

40

280

0.40

40

20

The two tables above set out information about the economy of Nautica. Use this information to work Problems 1 and 2.

1. What is the quantity of labor employed, potential GDP, the real wage rate, and total labor income?

2. Suppose that the government introduces a minimum wage of $0.80 an hour. What is the real wage rate, the quantity of labor employed, potential GDP, and unemployment? Does the unemployment arise from job search or job rationing? Is the unemployment cyclical? Explain.