Consider the labor market for restaurant workers in the Springfield metropolitan area. For

now, let us make the unrealistic assumption that this market is perfectly competitive and

characterize it using the model of supply and demand.

In this market, the $$product$$ being bought and sold is the labor of the restaurant workers. We

will represent the price in dollars per hour $($i$.$e$.,$ the wage rate$),$ and the quantity in total number

of hours worked.

The demand for labor represents the firms who want to hire workers $$ they are the $$consumers$$

who want to purchase labor. The supply of labor represents the workers themselves $$ they are

the ones willing to sell their labor to the market.

a$.$ Draw a simple supply$-$and$-$demand diagram representing this labor market. Instead of

the variable $,$ let$$s use the variable $$ to represent the price $($i$.$e$.,$ the wage rate$).$

Instead of $,$ let$$s use the variable $$ to represent the quantity $($of Labor$).$ Label your

axes accordingly.

For each of the following situations $($parts b and c$),$ sketch a new supply$-$and$-$demand

diagram that shows how this market might change as a result of the given shock. Illustrate

how the diagram will change and use the diagram to predict the impact on wages and total

employment of restaurant workers. Also provide a brief explanation $($in words$)$ describing

what will happen.

b$.$ High housing costs in the area drive many existing and potential restaurant workers to

move out of the region. $($Sketch the diagram and briefly explain what happens.$)$

c$.$ Many new restaurants open in the area. $($Sketch the diagram and briefly explain what

happens.$)$

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