JNU 2006 : have a look

[Anjali]

[Anjali]

Please help me with the third part of this question. The concept of labour force here is something that Iam not getting - it's application in third part .

[Atika Gupta]

I think it can be done in the following way:

Since, capital and labor are used in fixed proportion, we have leontif production function given by:
Y=min[K/a,L/b]

Since, capital is fully utilised and and labor force is unemployed economy is capital constraint.
Hence, Y=K/a
L=bK/a=bY

Let, u be unemployment in the economy and n be the total labor force in the economy.
Then, u=n-L

Case a: Y=2000=K/a
            L=2000b
u=n-2000b=(1/4)n
which implies that n=(8000b)/3

Case b: Y=2500
             L=2500b
            u=(8000b)/3-2500b=(500b)/3 which is (1/16)th of the labor force.
Hence, unemployment has decreases by (3/16)th of the labor force.