Question

Assumptions: These two graphs show two sectors of the labor market for a particular kind of labor. Relevant product markets are competitive. The two labor demand curves are identical. Initially the quantities of labor employed in the two sectors are L1 and L'1, and the wage rate in each sector is Wn. If a union is formed in sector 1 and the union increases the wage rate from Wn to Wu, then employment will Multiple Choice decrease, but we cannot determine by how much. decrease by 0L2 in sector 1. decrease by L1L2 in sector 1. increase by L1L2 in sector 1.

Answer 1

Answer:

Decrease by L1L2 in sector 1

Explanation:

Labour markets are at equilibrium when market demand for labour = market supply of labour.

Sector 1 previous equilibrium is 0L1, equilibrium wage is 0Wn (0 is origin). Union leads to increase in wage rate from 0Wn to 0Wu. This increase in wages lead to decrease in employment in sector 1. Supposing that the new equilibrium labour employed = 0L2, which is lesser than previous employment 0L1. So, the employment level falls by margin difference L1L2 in sector 1.