Economics 0115

Homework #2

Table 1: The Market for Steelworkers

W      LD0       LS0       LD1       LD2      LS1       LS2

\$10     400       00      480      320      160       **

\$12     360       40      440      280      200       **

\$14     320       80      400      240      240       **

\$16     280      120      360      200      280       **

\$18     240      160      320      160      320       00

\$20     200      200      280      120      360       40

\$22     160      240      240       80      400       80

\$24     120      280      200       40      440      120

\$26      80      320      160       00      480      160

\$28      40      360      120       **      520      200

\$30      00      400       80       **      560      240

1. Given the original supply and demand curves in Table 1 (LD0 and LS0), do the following:

a. Find the equilibrium wage and quantity of labor hired.

b. Calculate the total earnings of labor (TE) in this market.

c. Graph this situation and label all of the points described above.

d. What situation occurs when the wage is \$26? Explain how the market adjusts back to equilibrium when the wage is \$26.

NOTE: Show all work for sections requiring calculations.

2.   Using the numbers in Table 1, start with the equilibrium established with LD0 and LS0, draw the indicated shift in demand or supply, and briefly explain your graph. Then repeat 1.a. through 1.c. for the following:

a. There is a decrease in demand for steel as producers use aluminum instead of steel in their cans.

b. Legislation preserving the spotted owl reduces the supply of lumber and increases its price. As a consequence, many home-builders begin using structural steel frames to construct homes.

c. Because younger workers see better possibilities elsewhere, the number of retiring steelworkers exceeds the number of new steelworkers.

d. Unions negotiated a number of "givebacks" in the early 1980s which lowered the wages of steelworkers from \$26 to \$22. (Note: Unions will generally set wages above those set by the market because they have market power. Givebacks mean that unions are willing to lower wages to save jobs even though these lower wages are still above those set by the market.)

3. Using the numbers in Table 1, start with the equilibrium established with LD0 and LS0 and do the following:

a. The government establishes a minimum wage for unskilled workers at \$24. Draw this on a graph and briefly explain how this minimum wage will affect this labor market.

b. Calculate the welfare loss associated with the minimum wage and indicate the welfare loss on the graph. Briefly explain what a welfare loss is.

c. Graph and explain what happens when the minimum wage is raised to \$26. What happens to the welfare loss? Explain.

d. Graph and explain what happens to minimum wage workers in a recession. Then compare this result to what happens to workers who are not affected by the minimum wage.

Table 2

Taxed Sector (1)

W   \$12   \$14   \$16   \$18   \$20    \$22    \$24    \$26    \$28

LD0  110   100    90    80    70     60     50     40     30

LS0   30    40    50    60    70     80     90    100    110

LD1

Untaxed Sector (2)

W   \$12   \$14   \$16   \$18    \$20    \$22    \$24    \$26   \$28

LD0  110   100    90    80     70     60     50     40    30

LS0   30    40    50    60     70     80     90    100   110

LS1

4. Given the numbers in Table 2, do the following:

a. Graph the supply and demand for the taxed sector and label all relevant points with numbers.

b. A tax of \$4 per worker is levied on employers. Place the proper numbers in the row for LD1 and draw a new graph with this tax on it. Be sure to label the new equilibrium.

Table 2

Taxed Sector (1)

W   \$12   \$14   \$16   \$18   \$20    \$22    \$24    \$26    \$28

LD0  110   100    90    80    70     60     50     40     30

LS0   30    40    50    60    70     80     90    100    110

LD1

c. Extra Credit: Calculate the final burden for employer and worker and indicate each area on the graph.

d. Calculate the welfare loss and explain how it arose.

e. Graph the supply and demand curves for the untaxed sector and label all relevant points with numbers.

f. Show and explain what happens in the untaxed sector when those workers who were displaced by the tax attempt to find jobs in that sector. Fill in the second part of Table 2 for the new supply curve and label the new equilibrium.

Table 2

Untaxed Sector (2)

W   \$12   \$14   \$16   \$18    \$20    \$22    \$24    \$26   \$28

LD0  110   100    90    80     70     60     50     40    30

LS0   30    40    50    60     70     80     90    100   110

LS1