29CHAPTER 5 5-1. Suppose the labor supply curve is upward sloping and the labor demand curve is downward sloping. The study of economic trends over a particular time period reveals that the wage recently fell while employment levels rose. Which curve must have shifted and in which direction to produce this effect? If the supply curve does not shift, all wage and employment movements must occur along the supply curve, so that the wage rate and the employment level must move in the same direction. Because the wage went down while employment went up in the situation described in the question, it must have been the case that the supply curve shifted outwards (to the right). We do not have enough information to determine whether the demand curve shifted as well. 5-2. It takes time to produce a new economist, and prospective economists base their career decision by looking only at current wages across various professions. Further, the labor supply curve of economists is much more elastic than the labor demand curve. Suppose the market is now in equilibrium, but that the demand for economists suddenly rises because a new activist government in Washington wants to initiate many new programs that require the input of economists. Illustrate the trend in the employment and wages of economists as the market adjusts to this increase in demand. Initially, the market is in equilibrium at a wage w0 and an employment level of E0. The increase the demand for economists results in a new equilibrium wage of w1 and a new equilibrium employment level of E1. However, the demand for economists in the short-run is inelastic at E0, so the demand increase simply leads to a rise in the wage of economists (a...
