Question

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.

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.