Question

Production function			Labor market
Labor hours (millions)	Real GDP (millions of 2009 dollars)		Real wage rate (dollars per hour)	Quantity of labor demanded	Quantity of labor supplied
0	0			(millions of hours per year)
1	10		10	1	5
2	19		9	2	4
3	27		8	3	3
4	34		7	4	2
5	40		6	5	1

Use the information set out in the tables:

1. Calculate
   1. the quantity of labor employed,
   2. the real wage rate, and
   3. potential GDP. (Remember the law of supply and demand and equilibrium – where the quantity supplied is = to the quantity demanded – find this equilibrium point to get quantity, and then follow it across the table to calculate real wage rate and potential GDP).

Answer 1

		Labor market
Production function Labor hours (million)	Real GDP (millions of 2009 dollars)	Real Wage rate (dollars per hour)	Quantity of labor demanded (Millions of hours per year)	Quantity of labor supplied (Millions of hours per year)
0	0
1	10	10	1	5
2	19	9	2	4
3	27	8	3	3
4	34	7	4	2
5	40	6	5	1

a.

In the labor market, the equilibrium is given by the quantity of labor demanded and the quantity of labor supplied.

Hence, the quantity of labor employed is 3 million hours per year

b.

The equilibrium wage rate is the wage rate at which the market demand for labor is equal to the market supply of labor.

Hence, the real wage rate is 8 dollars/hour

c.

With 3 million hours per year of labor deployed in production, the real GDP is 27 million of 2009 dollars.

Hence, the potential GDP is 27 million of 2009 dollars.