SunBright Solar installs rooftop solar panels and hires installer-hours in a perfectly competitive local labour market. The table below shows the quantity of installer-hours demanded per week and the quantity of installer-hours supplied per week at different wage rates, both bef…

Answer: ((a)) Before the new tool, the equilibrium wage rate is $16 per hour, where quantity demanded and quantity supplied are both equal to 680 installer-hours per week ((b)) After the new tool, the equilibrium wage rate is $22 per hour, where quantity demanded and quantity supplied are both equal to 860 installer-hours per week ((c)) The change is a shift of the demand curve because it is caused by a rise in marginal physical product from the new tool, a non-wage factor, which raises marginal revenue product at every wage rate rather than only at one wage rate as a movement along the curve would ((d)) The percentage change in the equilibrium wage rate is 22-16/16×100=+37.5%. Part (a): Equilibrium before the new tool The equilibrium wage rate is the row of the table where the quantity of installer-hours demanded equals the quantity supplied, using the "before new tool" column. Scanning the table, this occurs at…

A2 Economics 9708: Productivity, MRP and a Shift in the Demand for Labour

Wage rate ($ per hour)	$Q_d$ before new tool (installer-hours/week)	$Q_d$ after new tool (installer-hours/week)	$Q_s$ (installer-hours/week)
10	800	1100	500
12	760	1060	560
14	720	1020	620
16	680	980	680
18	640	940	740
20	600	900	800
22	560	860	860

Wage rate ($ per hour)

Q_d

before new tool (installer-hours/week)

Q_d

after new tool (installer-hours/week)

Q_s

(installer-hours/week)

800

1100

500

760

1060

560

720

1020

620

680

980

680

640

940

740

600

900

800

560

860

Part (a): Equilibrium before the new tool

The equilibrium wage rate is the row of the table where the quantity of installer-hours demanded equals the quantity supplied, using the “before new tool” column. Scanning the table, this occurs at a wage rate of $16 per hour, where $Q_d = 680$ and $Q_s = 680$ .

So, before the new tool, the equilibrium wage rate is $16 per hour and equilibrium employment is 680 installer-hours per week.

Part (b): Equilibrium after the new tool

The new mounting-rail tool raises marginal physical product, so the marginal revenue product of labour, and therefore the quantity of installer-hours demanded, rises at every wage rate, as shown in the “after new tool” column. The new equilibrium is found where this new demand column equals the (unchanged) supply column. This occurs at a wage rate of $22 per hour, where $Q_d = 860$ and $Q_s = 860$ .

So, after the new tool, the equilibrium wage rate is $22 per hour and equilibrium employment is 860 installer-hours per week.

Part (c): Why this is a shift, not a movement along the curve

A movement along the demand curve for labour happens only when the wage rate itself changes, causing a different quantity to be read off the same curve. A shift of the demand curve happens when a non-wage determinant of labour demand changes instead, here, the new mounting-rail tool raises each installer’s marginal physical product ( $MPP$ ), and since $MRP = MPP \times MR$ , a higher $MPP$ raises the marginal revenue product of labour at every wage rate, not just at one. Because more installer-hours are now demanded at every possible wage (compare the “before” and “after” columns row by row), the whole demand curve for labour moves to the right. The new equilibrium in (b) is therefore where this shifted demand curve crosses the unchanged supply curve, not a different point on the original demand curve.

Part (d): Percentage change in the equilibrium wage rate

Using the original equilibrium wage of $16 as the base:

$\%\Delta W = \frac{22-16}{16}\times100 = \frac{6}{16}\times100 = 37.5\%$

So the equilibrium wage rate rose by 37.5% as a result of the new tool.

Final answers

(a) Equilibrium wage $=$ $16 per hour; equilibrium employment $=$ 680 installer-hours/week
(b) New equilibrium wage $=$ $22 per hour; new equilibrium employment $=$ 860 installer-hours/week
(c) This is a shift of the demand curve, caused by higher marginal physical product (a non-wage factor) raising MRP at every wage rate, not a movement along it
(d) Percentage change in equilibrium wage rate $=$ +37.5%