Calculate the equilibrium level of employment

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Reference no: EM133552777

Question 1) Suppose the labour market of a particular economy is described by the labour demand and labour supply equations as follows: Labour Demand Ld = 125 - 5w; Labour Supply Ls = 20 +10w. In these equations L is the number of labour hours and w is the hourly wage (dollars per hour). Assume that there is no minimum wage in place and the labour market is in equilibrium. The government decides to grant a payroll subsidy to firms, paying them $3 of subsidy for each labour hour that they employ. A) Derive the new after-subsidy labour demand curve. It is easier to calculate if we work with the inverse labour demand function which expresses wage as a function of labour demanded. Note that for the labour demand equation given in Q1 the inverse labour demand is given by wd=25-0.2L. The subsidy will shift this curve up by the amount of $3. The new inverse labour demand curve is then wd=25+3-0.2L, or wd=28-0.2L. Now convert this inverse labour demand function back to the standard form Ld = A - B*w. Using this post-subsidy labour demand curve, calculate the equilibrium level of employment after the payroll subsidy is put in place. Round your answer to the nearest integer. B) What fraction of the payroll subsidy paid to firms is passed onto workers? Round your answer to the nearest hundredth decimal place (e.g. supply answers which look like 0.55, 0.23, etc.).

Reference no: EM133552777

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