II. Suppose there are two industries, (A) and (B), and that the demand for labor
ID: 1106210 • Letter: I
Question
II. Suppose there are two industries, (A) and (B), and that the demand for labor, L, in each industry is LA 30- WA and LB 40- 2WB. Assume worker mobility across sectors is zero. 1) If the supply of labor is Ls = 2W, then what are the equilibrium wage and employment levels in this labor market? How much labor will be employed in each sector? Include a graph of your results. 2) If instead, if the supply of labor is Ls = 0.5 W, what would be the equilibrium wage and employment? Is labor employed in one or both sectors?Explanation / Answer
1). In a labour market economy, aggregate demand equals aggregate supply of labour in an equilibrium.
Ls = La + LB
2W = 30 - W + 40 - 2W
5W = 70
W = 14
La = 16
LB = 12
Ls = 2(14) = 28
2). Now, let 0.5W = 30 - W + 40 - 2W
3.5W = 70
W = 20
La = 30 - 20 = 10
Lb = 40 - 40 = 0
Ls= 0.5(20) = 10
Thus, we can see that labour is employed only in A sector.