Question

The labor market for architects has “cobwebs” and is described initially by the labor supply curve w=10+2E, labor demand curve w=50-E after which labor demand increases (due to a housing boom) to w=60-E.

a. Give the original employment and wage levels and then three rounds of wage and employment levels.

b. Illustrate the cobweb model on a graph, labeling the initial equilibrium point, a few rounds, and the new equilibrium wage and employment level.

Answer 1

Given labor supply curve w=10+2E, labor demand curve w=50-E therefore in equilibrium 50 - E = 10 + 2E
Thus, 40 = 3E or E = 40/3 = 13.33 and wage level would be W = 50 - 40/3 = 36.67

In the next round w=10+2E and w = 60-E so 60 - E = 10 + 2E thus, 50 = 3E or E = 50/3 = 16.66 and wage level would be W = 60 - 50/3 = 43.34

In the next round it will be w=10+2E and w = 70-E thus E = 20 and wage level would W = 70 - 20 = 50

In the next rounw it will be w=10+2E and w = 80-E thus E = 23.33 and wage level would W = 80 - 23.33 = 56.67

b) Below is the cobweb model which shows each period increment in wage and employment is influenced from previous period results. It starts from initial equilibrium point E = 40/3 = 13.33, W = 50 - 40/3 = 36.67 and moved on to 3 round abouts.