Question

Given the Labor demand and Labor supply functions, L = 50 – 5w and L =...

Given the Labor demand and Labor supply functions, L = 50 – 5w and L = 8 + 2w, sketch their graphs. Given the equilibrium daily wage of 6€ reached when there are 20 workers. Suppose that the actual Labor market situation is this: the daily wage is 8€. Under this situation, find the difference between Labor demand and Labor supply and show this clearly on the graph. Use simple economics, everyday language to describe the actual Labor market situation.

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Answer #1

When Wage= 8€,

Quantity demanded= 50-5*8= 10

Quantity Supplied= 8+2*8=24

Surplus labor= 24-10=14

When wage equal to 8€ is set, as it is set above the equilibrium wage rate of 6€, it is binding and it is known as the minimum wage rate.

At this level labor supplied is greater than labor Demanded, so their is surplus in the labor market. This leads to rise in unemployment rate

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