ECONOMIC POLICY. HOMEWORK 3
1. CONSIDER A LABOR MARKET WITH THE FOLLOWING LABOR SUPPLY AND LABOR
DEMAND FUNCTIONS:
Labor supply: w = 100 + 25L
Labor demand (marginal revenue product of labor): MRP = 1800 – 60L
For parts (a), (b) and (c), assume there are many firms and many workers in the market.
1 (a). What would be the equilibrium wage and the corresponding level of
employment?
Equilibrium Wage  W = MRP  100 + 25L = 1800 – 60L
35L = 1700  L= 1700/35 = 48.5714
If L = 48.57  W= 100 + (25 * 48.57)
W= 1 314.25  1 314.25 = 100 + 25L
1 (b). Assume the government introduces a minimum wage of 500. How would this
affect total employment? What would be the resulting unemployment rate? Explain
your results.
With minimum wage (500): W  500 = 100 +25L
Ls = 400/25 = 16  New level of employment
supply
MRP  500 = 1800 – 60L
Ld = 1300/60 = 21.6667  New level of
employment demand
Unemployment rate = Unemployed/(Employed + Unemployed)
UR = 5.67/(16+5.67) = 0.2617  26.17% of unemployment
1 (c) Assume the government introduces a minimum wage of 700. How would this
affect total employment? What would be the resulting unemployment rate? Explain
your results.
With minimum wage (700): W  700 = 100 +25L
Ls = 600/25 = 24  New level of employment supply
MRP  700 = 1800 – 60L  Ld = 18.33  New level of employment demand
Ur = 5.6/29.6 = 0. 2361  23.61 % of unemployment
For parts (d), (e) and (f), assume there is only one firm but many workers in the market:
1 (d). What would be the equilibrium wage and the corresponding level of
employment?
MRP = MC  MC = TC´  TC´= 100 + 50L
1800-60L = 100+50L  L= 1700/110 = 15.4545  So, Wage in equilibrium:
W= 100 + (25 * 15.4545) = 486.25
1 (e) Assume the government introduces a minimum wage of 500. How would this
affect total employment? What would be the resulting unemployment rate? Explain
your results.
With minimum wage (500): W  500 = 100 +25L
Ls = 400/25 = 16  New level of employment
supply
MRP  500 = 1800 – 60L
Ld = 1300/60 = 21.6667  New level of
employment demand
1 (f) Assume the government introduces a minimum wage of 700. How would this
affect total employment? What would be the resulting unemployment rate? Explain
your results.
With minimum wage (700): W  700 = 100 +25L
Ls = 600/25 = 24  New level of employment supply
MRP  700 = 1800 – 60L  Ld = 18.33  New level of employment demand