Question

With an initial wage rate of $15 per hour, Thomas works 35 hours per week and...

With an initial wage rate of $15 per hour, Thomas works 35 hours per week and leisures the remaining 75 hours. When his wage increases to $20 per hour he works 45 per week and when the wage increases to $25 heworks 40 hours per week. What is Thomas’ labor supply elasticity as his wage increases from $15 to $20 and then from $20 to $25? What does this value tell you about the shape of his labor supply curve and his sensitivityto changes in the wage? Can you graph Thomas’ labor supply curve.

Homework Answers

Answer #1
Wage rate Labor
15 35
20 45
25 40

Elasticity of supply between $15 to $20= (%change in labor supply/% change in wage rate)

% change in labor supplied = [(45-35)/(35+45)/2] = (10/40)= 0.25

% change in wage rate = [(20-15)/(15+20)/2] = (5/17.5) = 0.28

Elasticity of supply = 0.25/0.28= 0.89

Elasticity of supply between $20 and $25 = (% change in labor supply / % change in wage rate)

% change in labor supplied = [(40-45)/(40+45)/2] =(-5/42.5)= -0.12

% change in wage rate = [(25-20)/(25+20)/2] = (5/22.5)=0.22

Elasticity of supply = (-0.12/0.22)= -0.54

The labor supply is inelastic in both the wage rate ranges. But labor supply is positively sloped between $15 and $20 and Labor supply is negatively sloped between $20 and $25.

The labor supply of Thomas is backward bending supply curve.

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