labor supply: Ls 5 a-bar 3 w 1 , l-bar abor demand: Ld 5 f-bar 2 w The parameter

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labor supply: Ls 5 a-bar 3 w 1 , l-bar

abor demand: Ld 5 f-bar 2 w

The parameters in this setup are a, ,, and f. (Notice that parameters are denoted with an overbar, a convention we will maintain throughout the book.) The parameter , represents the number of hours workers would supply to the market even if the wage were zero; it therefore re%uFB02ects the inherent amount of time people like to work. The parameter f, on the other hand, re%uFB02ects the amount of labor the %uFB01rm would like to hire if the wage were zero. It might be thought of as some inherent capacity of the %uFB01rm (perhaps because the %uFB01rm owns a given amount of land and capital that cannot be altered)

(a)What is the economic interpretation of a-bar

(b) What are the endogenous variables in this model?

(c) Solve for the equilibrium of the labor market. That is, solve for the endog- enous variables as a function of the parameters of the model.

(d) If , increases, what happens to the equilibrium wage and employment levels? Does this make sense? (Hint: Think about what happens in the supply-and-demand diagram for the labor market.)

(e) Answer the same questions in (d) for an increase in f-bar

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