Question

Suppose the world price of steel falls substantially. The demand for labor among steel-producing firms in Pennsylvania will increase. The demand for labor among automobile-producing firms in Michigan, for which steel is an input, will increase. The temporary unemployment resulting from such sectoral shifts in the economy is best described as frictional unemployment.True / False.

Answer 1

False; True; True

Step-by-step explanation:

The fall in the world price, would mean a decline in the revenue for steel-producing firms, while low price of steel would favor those manufacturers that depend on steel as an input for production of automobiles.

Therefore, let us examine how true or false the listed statements in the question are regarding the fall in world price of steel:

Statement 1, which states “the demand for labor among steel-producing firms in Pennsylvania will increase is FALSE. Decline in world price would lead to a drop in revenue for steel-producing firms, this would not likely lead to engaging more workers, as there would be likely layoff of workers or paycuts for workers. Labor among steel-producing firms in Pennsylvania will DECREASE.

Statement 2, which states “The demand for labor among automobile-producing firms in Michigan, for which steel is an input, will increase.” is TRUE. Decline in world price of steel would enable automobile-producing firms to increase their output by obtaining more steel, hence, more workers would be hired.

Statement 3, which states, “The temporary unemployment resulting from such sectoral shifts in the economy is best described as frictional unemployment” is TRUE. Frictional employment is what occurs when a sector losses workers or workers move to another sector in search of employment as a result of economic situations such as a drop in world price of steel.

Answer 2

Answer: The answers are: False; True; True.

Explanation: When the price of steel falls, this would translate to a reduced quantity of steel produced among steel-producing firms. The demand for labor therefore would decrease.

As the price of steel falls, the automobile-producing firms that use steel as an input will increase production because they can now purchase more steel. This increase in production will lead to an increase in demand for labor. Therefore labour will increase.

The temporary unemployment caused by this sectoral shift is referred to as Frictional Unemployment.

Frictional Unemployment results when people move between jobs.

Therefore, the movement of labor from firms that need less labor (the steel-producing firms) to firms that require higher level of labor (the automobile-producing firms) is called Frictional Unemployment.