"We estimate the effects of Wal-Mart stores on county-level retail employment and earnings, accounting for endogeneity of the location and timing of Wal-Mart openings that most likely biases the evidence against finding adverse effects of Wal-Mart stores. We address the endogeneity problem using a natural instrumental variables approach that arises from the geographic and time pattern of the opening of Wal-Mart stores, which slowly spread out from the first stores in Arkansas. The employment resultsindicate that a Wal-Mart store opening reduces county-level retail employment by about 150 workers, implying that each Wal-Mart worker replaces approximately 1.4 retail workers. This represents a 2.7 percent reduction in average retail employment. The payroll results indicate that Wal-Mart store openings lead to declines in county-level retail earnings of about $1.4 million, or 1.5 percent. Of course, these effects occurred against a backdrop of rising retail employment, and only imply lower retail employment growth than would have occurred absent the effects of Wal-Mart."

Suppose that Wal-Mart expands its stores and employment in the Washington DC area to 5 new locations and 1,000 new workers. Suppose the elasticity of supply of retail workers is 1.

1. Draw a graph showing what happens to employment and wages of retail workers in the DC area.
2. Ifprior tothe Wal-Mart expansion, there were 16,000 retail workers earning $12 per hour in the DC area, what will the level of hourly wages be after the Wal-Mart expansion?