The figure below represents the U.S. labor market. Assume that labor and capital

Question

The figure below represents the U.S. labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S0 (= 2) and consists entirely of native U.S. workers. The horizontal axis is in millions. The demand schedule of labor is denoted by D0

with intercepts at 15 and 6.

At labor market equilibrium given by S0  (= 2) and D0, the payment to U.S. capitalists equal:

Consider the figure above. Suppose labor supply increases from S0 to S1 ( = 3) due to immigration. As a result, the US capitalists now earn:

Select one:

a. $ 18 million

b. $ 24 million

c. $9 million

d. None of the above

Explanation / Answer

When the supply is S0, then the earnings of the US capitalists is given by the area below the demand curve and above the price line $12. Therefore, the earnings of the US capitalists is $3 millions (=1/2×Length×Breadth = 1/2×($15-12)×2 millions = 1/2×$3×2 millions).

When the supply is S1, then the earnings of the US capitalists is given by the area below the demand curve and above the price line $9. Therefore, the earnings of the US capitalists is $9 millions (=1/2×Length×Breadth = 1/2×($15-9)×3 millions = 1/2×$6×3 millions). The correct answer is (c).

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