5. Consider a labor market where supply and demand are given by: L, = 200 + 40w
ID: 1152130 • Letter: 5
Question
5. Consider a labor market where supply and demand are given by: L, = 200 + 40w = 800-20u, where w is the wage rate. (a) What is the equilibrium market wage and employment? (b) Suppose workers negotiate a benefit worth S1 per worker that costs employers $1 to implement. What is the new equilibrium wage, total compensation for a worker, cost of employing a worker, and labor supplied? Is the equilibrium efficient? Why/why not? (c) Suppose instead that the benefit is worth $1 to the workers and costs $2 to implement. What is the new equilibrium wage, cost of employing a worker, and labor supplied? Is the equilibrium efficient? Why/why not?Explanation / Answer
a) To find equilibrium wage and supply of labors equalize demand and supply as follows -
200+40w = 800-20w
60w = 600
w = 10
and L = 200+(40*10) = 600
henec labor supplied is 600 labors and wage rate is $10 per worker.
b) IF benefit cost $1 to workers then new supply function would be
Ls = 200 +40(w+1)
and cots if $1 to implement then new demand would be
Ld = 800 - 20(w+1)
now equate new demand and supply
200 +40(w+1) = 800 - 20(w+1)
240 + 40w = 780 - 20w
w = $9
and Labor supply = 200 + 40(9+1) = 600
Total compensation for worker = wage + benefit = $9+$1 = $10
Total cost of employers per worker = wage + implementation cost per worker = $9+$1 = $10
As the benefits and costs per worker is same as before and also the labor supply then this is efficient equilibrium.
c) New labor demand = 800 - 20(w+2)
Now
800 - 20(w+2) = 200 +40(w+1)
760 - 20w = 240 + 40w
w = $8.667
and Labor supply = 200 + 40(8.667+1) = 586 approximately
per worker compensation = $8.667 + $1 = $9.667
per worker cost = $8.667 + $2 = $10.667
As this results out lesser compensation and more costs than earlier and also the labor supply is less it is not efficient equilibrium.