1 answer

(2) Labor in Boom and Recession Assume there is a labor force of 20 workers at...

Question:

(2) Labor in Boom and Recession Assume there is a labor force of 20 workers at an isolated site. During boom the firm faces a
(2) Labor in Boom and Recession Assume there is a labor force of 20 workers at an isolated site. During boom the firm faces a demand curve of P-100-Q. During recession it faces a curve of 80-20. Boom and recession are equally likely to occur. a) How many workers are employed in boom, how many during recession? What are the corresponding wages? Calculate the consumer surplus of the firm in boom and in recession What is the expected surplus? b) Now assume a large cluster where the labor supply is infinitely elastic. Assuming the same demand curves as in the Question above and the average wage of the isolated site (also from the Question above), how many workers are employed in boom? How many are employed during recession? What are the corresponding wages? Calculate the consumer surplus of the firm in boom and in recession. What is the expected surplus? b) Now assume a large cluster where the labor supply is infinitely elastic. Assuming the same demand curves as in the Question above and the average wage of the isolated site (also from the Question above), how many workers are employed in boom? How many are employed during recession? What are the corresponding wages? Calculate the consumer surplus of the firm in boom and in recession. What is the expected surplus?

Answers

Answer:

Labor in Boom and Recession.

There is a labour force of 20 workers at an isolated site

=> boom the firm faces a demand curve  of P=100-Q.

=> recession curve of 80-2Q.

a)

During recession the number employed fined =20

wage rate=100-20

=80

During recession the number employed fined =20

wage rate=80-2*20

=80-60

=$20

cs is in boom (employers gain)= 1/2*(100-80)*20

=1/2*20*20

=200

cs is recession = 1/2*(80-20)*20

=1/2*60*20

=600

Expected surplus =1/2*200 +1/2*600

=100+300

=400

Expected wage =1/2*80 +1/2*20

=40+10

=50

b)

At a wage of 50 , number of workers fined in boom is 50=100-Q

Q=50 workers

in recession firm will hire =50=80-2Q

2Q=80-50

Q=30/2

Q=15 workers

=> wage is same 50

cs boom =1/2*(100-50)*50

=1/2*50*50

=1250

cs recession=1/2*(80-50)*15

=1/2*15*15

=225

Expected surplus =1250+225/2

=1475/2

=737.5

.

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