Title

Production function Labor market Labor hours (per day) Real GDP (2005 dollars per year) Real wage...

Description

Production function			Labor market
Labor hours (per day)	Real GDP (2005 dollars per year)		Real wage rate (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 set out information about the economy of Nautica. Use this information to work Problems 7 and 8.

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

8. 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.

9. Fixing up for the fall show

Businesses damaged by flooding from Tropical Storm Irene are under pressure to rebuild and reopen this week as Vermont’s peak leaf-peeping season begins. Not everyone is cheering. Vermont’s recovery hasn’t reached every road, and the rebuilding work will persist long after the maple leaves fall.

Source: The Wall Street Journal, September 21, 2011

Explain the effect of Tropical Storm Irene on employment across Vermont. Did Vermont move along its production function or did its production function shift? How did Vermont’s potential GDP change?