dolution

 

1. Consider a simple demand-and-supply model of a competitive labour market in a small town. The  demand and supply curves for labour are given by

 

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                                                Demand: w = 18 − 3LD

Supply: w = 3 + 2LS

 

where w is the wage ($ per hour) and L is the number of hours of employment (measured in thousands of hours per month).

 

a. Plot the demand and supply curves to scale.

 

b. Solve for the equilibrium level of w and L in the case of no government intervention.

 

c. Now suppose that the town council imposes a minimum wage equal to $10 per hour. What is the new level of employment?

 

d. Identify in your diagram the area that is the deadweight loss. Compute its size, measured in thousands of dollars per month.

 

 
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