Question

Y = F(K,L) = A K1/2L1/2 The data for this economy is A=10, K0=200 and the initial population is L0=200. We will assume that everyone in this country works so that population equals employment and per-person GDP equals per-worker GDP. Note that each worker starts off with one unit of capital to work with. We will analyze the short-run effects of an inflow of immigrants into the economy. It is short-run effects because we will keep the stock of capital fixed at its initial value. Suppose that in 2018 the economy receives a large inflow of immigration that increases the labor force by 10% to L1=220. To answer the following questions, draw diagrams on paper for the labor market and for the capital market. Make sure you label your axes and curves carefully. Label the initial equilibrium as point A. Now shift the appropriate curves and draw the short-run equilibrium and label it as point B. In the labor market the supply shifts to the _____________; and the demand shifts to the _______________.

Answer 1

In the labor market the supply shifts to the right; and the demand remains the same.

Step-by-step explanation:

Employees offer labor; they supply the labor market. And employers request labor; they demand labor. The labor prices are wages and the quantity is the labor quantity (shown in the figure attached).

First, the labor market was at equilibrium in point A. After the immigrant inflow, there is more people who wants to offer labor, this will lead to an increase in the labor supply. In the labor demand and supply graph, the supply curve will shift to the right. The new equilibrium is represented by point B. There is no change in demand because in the short run immigrants will represent more people who wants jobs, in the long run maybe some of those immigrants will create firms that will demand labor.