Room Rates and Licensing Repeal
The question
The competitive labor market for hotel housekeepers in the coastal town of Marisdale is in equilibrium. A newly opened resort region several hours away draws vacationers elsewhere, and the nightly rate Marisdale hotels can charge falls sharply. In the same month the state repeals a rule that had required every hotel cleaner to hold a costly certification before taking the job, a requirement that had kept many willing people out of the occupation. Assume housekeeper productivity is unchanged throughout, and show the effect on the labor market for housekeepers. Show the effect on the Labor Market graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Room Rates and Licensing Repeal: the worked answer
On the Labor Market graph, Labor demand (DL) shifts left and Labor supply (SL) shifts right.
Why Labor demand (DL) shifts left and Labor supply (SL) shifts right
Labor demand is the marginal revenue product of labor, marginal product times the price of the output, and the output here is a hotel room night. When the nightly rate falls with productivity held constant, each housekeeper's MRP falls, so hotels are willing to hire fewer housekeepers at every wage and labor demand shifts left. The repeal of the costly certification removes a barrier to entering the occupation, so more people are willing and able to work as housekeepers at every wage and labor supply shifts right. Both shifts push the wage down, so the equilibrium wage definitely falls. They push employment in opposite directions, because the demand shift reduces the number of housekeepers hired while the supply shift increases it, so equilibrium employment is indeterminate. The stem never says which shift is larger, so employment rises if the supply shift is larger, falls if the demand shift is larger, and is unchanged if the two are equal.
What happens to the equilibrium
The equilibrium wage definitely falls, while equilibrium employment is indeterminate and depends on whether the supply shift or the demand shift is larger.
The mistake students make on this one
Students overwhelmingly answer that the wage falls AND employment falls, treating the resort news as the real story and the licensing repeal as a detail, which loses the point because employment cannot be signed here. A related error is shifting labor supply left instead of right, reasoning that people will avoid an occupation whose pay is dropping; the lower wage is an outcome of the two shifts, and workers reacting to it move along the new supply curve rather than shifting it again.
On exam day
When the two shifts fight over one variable, sketch it twice, once with a tiny supply shift and once with a huge one, and if employment lands on opposite sides of the original quantity, say 'indeterminate' in words rather than hoping the grader reads your drawing.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Labor demand (DL) shifts left and Labor supply (SL) shifts right and every other curve on the Labor Market graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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