Question

 4. Minimum wage legislation

 The following graph shows the labor market in the fast-food industry in the fictional town of Supersize City.

 Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

 In this market, the equilibrium hourly wage is _______  , and the equilibrium quantity of labor is _______  thousand workers.

 Suppose a senator introduces a bill to legislate a minimum hourly wage of $8. This type of price control is called a _______ 

 For each of the wages listed in the following table, determine the quantity of labor demanded, the quantity of labor supplied, and the direction of pressure exerted on wages in the absence of any price controls.

 True or False: A minimum wage above $10 per hour is not a binding minimum wage in this market.

•  True

•  False

Answer 1

Ans

a) Equilibrium in the market is where the demand for labour equals the supply of labour. This gives us the equilibrium quantity of labour as 300 thousan of workers and wage as $10 per hour.

Minimum wahe law sets a floor to the wage. So, it cannot fall below it. But the minimum wage law of $ 8 per hour is below the market clearing price making this superfluous. This kind of price control is called non-binding price control.

b) At wage of $6 per hour, quantity supplied is 180 thousand workers and quantity demanded is 420 thousand workers creating a shortage of labour of 240 thousand workers in the market which puts an upward pressure on the wage rate.

c) At wage of $14, quantity supplied is 420 thousand and quantity demanded is 180 thousand, so, this creates a surplus of 240 thousand workers which purs a downward pressure on the wage rate.

d) False, as $10 is market clearing wage, so, minimum wage of above $10 will increase the quantity supplied in the market and decrease quantity demanded in the market creating a surplus of workers which puts down pressure on wage rate but due to wage control, wage cannot come back to its equilibrium level $10. Thus, this wage control above $10 is binding.

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