The labor market in a country named Overthereica is perfectly competitive and in long-run equilibrium.

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1.    The labor market in a country named Overthereica is perfectly competitive and in long-run equilibrium. Suppose a civil war in Farflungia, a neighboring company, causes many Farflungian workers to come to Overthereica and enter the Overtherican labor market.

  1. Explain how the increased number of workers in the Overtherican labor market will affect each of the following in Overthereica, ceteris paribus.

(i)           The wage of the workers

Sample Answer

The wage of workers will decrease due to the increase in the supply of labor.

(ii)          A typical firm’s production costs

Sample Answer

A firm’s production costs will decrease since the price of labor decreased.

(iii)         The price of goods produced by the workers

Sample Answer

With lower labor costs, the supply of goods increases. An increase in supply causes the price to decrease.

2.Now assume that the demand for the goods produced by the workers in part (A) of this question decreases. Explain how this decrease in demand will affect the following:

(i)           The price of the goods produced by the workers

Sample Answer

The decrease in demand pushes the price down even further.

(ii)          The demand for labor in Overthereica

Sample Answer

Firms will demand less labor, since the demand for the good labor depends on decreases.

(iii)         The wage of the workers

Sample Answer

Wages will decrease even more as the demand for labor decreases.

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