The labor market model (II): Now we add some parameters to the labor market model: labor supply: Ls = × w + labor demand: Ld = - w The parameters in this setup are , , and . (Notice that parameters are denoted with an overbar, a convention we will maintain throughout the book.) The parameter represents the number of hours workers would supply to the market even if the wage were zero; it therefore reflects the inherent amount of time people like to work. The parameter , in contrast, reflects the amount of labor the firm would like to hire if the wage were zero. It might be thought of as some inherent capacity of the firm (perhaps because the firm owns a given amount of land and capital that cannot be altered). (a) What is the economic interpretation of ? (b) What are the endogenous variables in this model? (c) Solve for the equilibrium of the labor market. That is, solve for the endogenous variables as a function of the parameters of the model.
The labor market model (II): Now we add some parameters to the labor market model:
labor supply: Ls = 
× w +
labor demand: Ld = 
- w
The parameters in this setup are , , and 
. (Notice that parameters are denoted with an overbar, a convention we will maintain throughout the book.) The parameter represents the number of hours workers would supply to the market even if the wage were zero; it therefore reflects the inherent amount of time people like to work. The parameter , in contrast, reflects the amount of labor the firm would like to hire if the wage were zero. It might be thought of as some inherent capacity of the firm (perhaps because the firm owns a given amount of land and capital that cannot be altered).
(a) What is the economic interpretation of ?
(b) What are the endogenous variables in this model?
(c) Solve for the equilibrium of the labor market. That is, solve for the endogenous variables as a function of the parameters of the model.
(d) If increases, what happens to the equilibrium wage and employment levels? Does this make sense?
(e) Answer the same questions in (d) for an increase in .
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