# Are firms better with the living wage ordinance or the training classes?

(75 points total) Please show all work

Suppose the labor supply for a firm is given by:

NS = 5 + 2w

and REAL Labor Demand (MPN) is given by:

MPN = A K – 2 N

A = 10, K = 4

a)(5 points) Calculate the market clearing real wage and labor input (show work).

In the space below, draw a picture of this labor market labeling this initial equilibrium as point A. Be sure to label your graph completely.

15 points for correct and completely labeled diagram

b)(10 points) The local government votes on and passes a living wage ordinance, similar to a minimum wage, making it illegal to pay less than 20 in real terms – that is, the living wage is 20 – it is illegal for firms to pay less – we can assume we are in the base period so that nominal wages are the same as real wages. How many workers are willing to work at a real wage of 20 and how many workers are firms willing to hire? What do we call this difference?

c)(10 points) Explain exactly why the firm changes their behavior given the governments decision to impose a living wage = 20. Start with at the same level of labor input…….

d)(5 points) Compare the number of people willing to work before and after the living wage legislation – why is this number so different?

e) (10 points) Suppose the local government decides not to pass the living wage ordinance and instead passes a bill where county workers have access to classes designed to increase their human capital and thus, increase their productivity. It works!

“K” which of course stands for human and physical capital rises to 7 (it was 4)

Resolve for the market clearing real wage and labor input and label this point as C on your graph.

f)(10 points) Now consider the movement from point A to point C on your graph. Explain why the firm changes their behavior – explain using specific numbers again starting your answer with at the same level of labor input…….

g)(5 points) Were workers better off with the living wage ordinance or with the classes that increase their human capital? Explain.

h)(5 points) Are firms better with the living wage ordinance or the training classes? Explain.