11. How price changes impact the labor market Consider the labor market for the
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Question
11. How price changes impact the labor market Consider the labor market for the fast-food industry, which consists mainly of high school and college students. Assume that all fast-food restaurants are profit maximizing. The followng calculator shows the market demand curve (blue curve) and market supply curve (orange curve) for student workers, who are responsible for making tacos. At any time in this problem, you can click the Reset to Initial Values button to return the elements in the calculator to their original positions. You will not be graded on any changes to the calculator: it's just here to help you answer the following questions. Tool tip: Use your mouse to drag the horizontal green line on the graph. The values in the boxes on the right side of the calculator will change accordingly. You also can directly change the values in the boxes with the white background by dlicking in the box and typing. The graph and any related values will change accordingly. Graph Input Tool LABOR MARKET CALCULATOR 20 18 16 14 12 10 Wage rate 14 Labor Labor supplied (Thousands of workers) 30 70 manded Thousands of Price of a taco [ d 0 10 20 30 40 50 60 70 0 90 100 QUANTITY OF LABOR (Thousands of workers) When the price of a taco is $4, the equilibrium wage in the fast-food labor market is per hourExplanation / Answer
When the price of a tac is $4, the equilibrium wage in the fast-food labour market is $10 per hour.
Suppose that the demand for tacos increase enough so that the price of a taco rises to $8, ordinarily, this would result in a new equilibrium level of employment and wage in the labour market for young people who work in fast food restaurants.
However restaurant claim they can only afford to pay the initial equilibrium wage. In this labour market, if the price of tacos increases, it wants continue to pay the equilibrium wage that prevailed before the increase in demand for tacos, there will be labour shortage of wage workers.
The equilibrium wage rate is $10 because at this wage rate labour demand and labour supply are equal. If price of tacos goes up then there will be a tendency to wage increase. If they do not pay higher wage their real income will fall. It means the real income of the wage workers fall. As a result of fall in real wage rate there will be decline in labour supply. There will be tendency to move in other sector.
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