There is a firm in Walla Walla, an isolated site with a labor force of 20 workers. During boom the firm faces a demand curve of P=100-Q. During recession it faces a curve of 80-2Q. Boom and recession are equally likely to occur. 

a) How many workers are employed in Walla Walla in boom, how many during recession? What are the corresponding wages? Calculate the consumer surplus of the firm in boom and in recession. What is the expected surplus?

 b) Now assume a large cluster where the labor supply is infinitely elastic. Assuming the same demand curves as in the Question above and the average wage of isolated Walla Walla (also from the Question above), how many workers are employed in boom? How many are employed during recession? What are the corresponding wages? Calculate the consumer surplus of the firm in boom and in recession. What is the expected surplus?

Answer rating: 100% (QA)

a Boom Demand curve P 100 Q Labor available 20 workers Equating demand and supply 100 Q Wage Solvin... View the full answer