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Demand and Supply

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In this assignment, we are considering a labor market, where “labor” is the commodity being exchanged, at a price called “wage.”  Quantity here is simply quantity of labor.  In this case, households are doing the “supplying,” as they supply labor.  Firms are doing the “demanding,” as they want to hire labor as an input to production.  So please don’t get confused: the supply curve represents how much labor households will supply at different wages, and the demand curve represent how much labor firms will demand at different wages.  In this assignment,  hospitals are the firms, and two types of labor are being supplied: physicians (PHs) and physician assistants (PAs).  Let W=Wage and L=Labor.

  1. Draw market demand and supply curves for physicians and physician assistants indicating a market clearing price (wage) for each.  Label each graph.  Consider the effect on each labor market when the following happens: hospitals decide to substitute physician assistants for physicians, ceteris paribus.  Show this change on your graphs.
  2. What happens to the market wage for each type of labor as a result of the substitution?  What happens to the market-clearing quantity of each type of labor?  Provide your answer in one very brief paragraph, and illustrate with graphs.
  3. Now consider what would happen under the following scenario: The hospitals are contractually obligated to increase the wage of one group if the wage of the other group increases.  That is, if the wages of physicians are increased, then the wages of physician assistants must also be increased, and vice versa.  Would there result a shortage or a surplus in one or both of the two markets (that is, market for PHs and market for PAs)?   (Hint: If you call your new equilibrium wage is W*, then if the hospital is forced to pay a higher wage than W*, how will that impact quantity demanded compared with quantity supplied?  Provide your answer in one very brief paragraph, and illustrate with graphs.

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