True or False: The more that the labor supply decreases in response to a decrease in wages, the larger are the supply-side effec
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Answer:
Wage rate = $960
Explanation:
Supply of labor is the number of hours workers are willing to work at a given real wage rate. When wage rate increases, supply of labor also increases because more people are encouraged as now they can obtain a higher income. When wage rate decreases, labor supply also decreases.
<em><u>View diagram</u></em>
In this case, however, there has been a decrease in supply, causing the supply curve to shift from S to S1. This can be due to many reasons such as migration, increase in minimum working age or increase in interest in education causing more people to study. When the supply of labor falls, there are less people available for work. Thus, demand exceeds supply, causing a shortage. Hence, the pressure causes price, i.e. wage rate to increase. To determine by how much the increase is, cross-multiplication can be used:
At 25 laborers, wage rate is $600 (25 = 600)
At 15 workers, wage rate is X (15 = X)
We now substitute for X, which is the amount by which wage rate will increase.
25 / 600 = 15 / X
Thus, 25X = 9000 (600 x 15)
9000 / 25 = X
X = 360.
Hence, wage rate at 15 laborers is 600 + 360 = $960
