Question

2. Low skilled workers operate in a competitive market. The labor supply is Os = 20W (where W is the hourly wage) and the demand for labor is Qd = 200 - 10W (O measures the quantity hired is thousanas oi hours). a. What is the equilibrium wage and quantity of labor working in equilibrium b. If the government passes a minimum wage of $10 per hour, what will be the new quantity of labor hired? c. Will there be an excess demand or supply of labor? How much? (d. What is the deadweight loss of the minimum wage?

Answer 1

a) At the equilibrium Quantity of labor supplied = quantity of labor demanded

20W = 200 - 10W

30W = 200

W = 200/30 = $6.67 per hour

This is the equilibrium wage. The equilibrium quantity of labor demanded and supplied is 20*6.67 =

133.33 thousand hours

b) Minimum wage of $10 per hour is binding since market clearing wage rate is $6.67 per hour which

is lower than the minimum wage. At this wage rate, new quantity hired = 200 - 10*10 = 100 thousand

units of labor

c) There is an excess supply of labor which means Qs = 20*10 = 200 units and Qd = 200 - 10*10 =

100 units so excess supply is 200 - 100 = 100 units of labor

d) DWL = 0.5*(minimum wage - wage at 100 units of labor)*reduction in labor units hired

= 0.5*(10 - 5)*(133.33 - 100)

= $83.33