Consider two identical jobs, but some jobs are located in Ashton while others are located in Benton. Everyone prefers working in Ashton, but the degree of this preference varies across people. In particular, the preference (or reservation price) is distributed uniformly from $0 to $5. Thus, if the Benton wage is $2 more than the Ashton wage, then 40% of the working population will choose to work in Benton. Labor supply is perfectly inelastic, but firms compete for labor. There are a total of 25000 workers to be distributed between the two cities. Demand for labor in both locations is described by the following inverse labor demand functions:
Ashton: w1 = 20 - 0.0024E1
Benton: w2 = 20 - 0.0004E2
Solve for the labor market equilibrium by finding the number of workers employed in both cities, the wage paid in both cities and the equilibrium wage differential.
Ashton: w1 = 20 - 0.0024E1
Benton: w2 = 20 - 0.0004E2
Solve for the labor market equilibrium by finding the number of workers employed in both cities, the wage paid in both cities and the equilibrium wage differential.