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Shift of labor supply in two sectors

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Consider a tropical island economy with two sectors, souvenir manufacturing and hospitality (hotels). Both sectors are perfectly competitive, and workers are equally able and willing to work in either industry. Only foreign tourists demand souvenirs and hotel stays, so changes in the domestic labor market do not affect the product demand curve in either sector.

Suppose that workers in the souvenir manufacturing industry unionize. This shifts the supply of labor in the souvenir manufacturing sector to the left and shifts the supply of labor in the hospitality sector to the right.

1)Show the effect of unionization in the souvenir manufacturing sector on the market for souvenirs. (In what direction does the supply and/or demand curve go - left or right)

2)Show the effect of unionization in the souvenir manufacturing sector on the hospitality industry. (In what direction does the supply and/or demand curve go - left or right)

3)As a result of the unionization, the price of souvenirs will _____ and the price of hotel stays will _____. (Hint: You may want to refer back to your previous answers.)

A. Increase; stay the same

B. Stay the same; decrease

C. Increase; increase

D. Increase; decrease

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Solution describes the effect of shift in labor supply in one sector on supply of labor in another sector. Answer is explained with suitable graphs.

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Solution:

1)Show the effect of unionization in the souvenir manufacturing sector on the market for souvenirs. (In what direction does the supply and/or demand curve go - left or right)

Since labor supply in souvenir manufacturing has shifted ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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