The following figure shows the labor demand curve, LD₁, and labor supply curve, LS₁, in a market. A month later, the labor demand curve shifts to LD₂.

-Refer to the figure above.If there is downward wage rigidity in the market,what will be the unemployment in the market after the demand curve shifts to LD₂?

Question

The following figure shows the labor demand curve, LD₁, and labor supply curve, LS₁, in a market. A month later, the labor demand curve shifts to LD₂.
 
-Refer to the figure above.If there is downward wage rigidity in the market,what will be the unemployment in the market after the demand curve shifts to LD₂?

Quizplus · Accepted Answer

Downward wage rigidity means that wages are sticky and cannot adjust downwards easily in response to changes in demand. When the demand curve shifts from LD₁ to LD₂, there will be an excess supply of labor at the original wage rate, which will lead to unemployment. Since wages cannot fall, this unemployment will persist. The difference between the quantity of labor supplied at the original wage (LS₁) and the quantity of labor demanded at the new wage (LD₂) is 10 units of labor. Therefore, the answer is B.

The Following Figure Shows the Labor Demand Curve, LD₁, and Labor