Question

The economy's labor market is described by the following labor demand curve, ND(w)=100−5w, and the following labor supply curve. N5(w)=−50+5w, where w is the real wage. A positive productivity shock shifts the labor demand curve to ND(w)=110−5w. How does this shock affect the equilibrium real wage? A. real wage increases by $1 B. real wage falls by $1 C. real wage increases by 10% D. real wage falls by 10%.

Answer 1

A. The real wage increases by $1.

Step-by-step explanation:

To determine how the positive productivity shock affects the equilibrium real wage, we need to compare the initial equilibrium and the new equilibrium after the shock.

The initial equilibrium occurs where labor demand (ND(w)) equals labor supply (NS(w)). Let's calculate the initial equilibrium real wage:

ND(w) = NS(w)

100 - 5w = -50 + 5w

Rearranging the equation:

10w = 150

w = 15

So, the initial equilibrium real wage is $15.

After the positive productivity shock, the labor demand curve shifts to ND(w) = 110 - 5w. To find the new equilibrium real wage, we set the new labor demand equal to the labor supply:

110 - 5w = -50 + 5w

Rearranging the equation:

10w = 160

w = 16

The new equilibrium real wage is $16.

Comparing the initial and new equilibrium real wages, we can see that the real wage increases from $15 to $16. Therefore, the correct answer is:

A. The real wage increases by $1.