Labor Market Example #2
Note: For Tuesday’s Super Quiz, you do not have to know how to do part g)
Problem 1. Suppose firm output in an economy is represented by the table 1 above. If the firm can sell each
unit of output for $2 (i.e. the Price level = 2) , use this information to complete table 1 so you
can determine the hours desired by firms in table 2.
a. What is the equilibrium wage rate?
b. This is a real wage of?
c. Why will workers get paid more than $2? EXPLAIN how this happens.
d. Now suppose the price level falls to 1.2 but workers do not adjust their wage demands.
Find the new equilibrium wage rate and hours hired.
e. In your answer above, this is a real wage of?
f. What happened to the number of hours hired? Worked?Explain
g. Complete table 3. After workers adjust their wage demands, the equilibrium nominal
wage will be _______ and their real wage will be _______ and firms will hire
__________ and households will be willing to work _________. Explain this result.
Table 1 Table 2
N
Output
0
0
2
40
4
50
6
58
8
65
Wage
Labor
Hours
Supplied
by
workers
(P=2)
Labor
hours
desired
by firms
P=2
Labor
hours
desired
by firms
P=1.2
4
2
6
4
8
6
12
8
when
by firms
P=1.2
4
2
6
4
8
6
12
8