Question

1) Suppose the labor market is defined by the following supply and demand curves where w represents the wage rate (measured in dollars per hour) and L represents the quantity of labor (measured in hours). Demand: w = 25 -0.005L Supply: w = 4 +0.002L a) What is the value of worker surplus and firm surplus? (1 point) b) If the government imposes a minimum wage of $13/hour, what is the value of worker surplus and firm surplus? What is the value of deadweight loss? (3.5 points) c) If the government imposes a minimum wage of $15/hour, what is the value of deadweight loss? Make a statement regarding the relationship between the value of the minimum wage and the value of deadweight loss. (2.5 points)

Answer 1

a) solving demand and supply equation w=25-0.005L=4+0.002L gives L=3000 and W=$10/hr now demand =0 at W=25 same way supply =0 at W=4 so, firm surplus=1/2*(25-10)*3000=22500 and worker surplus=1/2*(10-4)*3000=$9000

b.if minimum wage is $13/hr, demand for labor will be 2400, at L=2400 W for supply=8.8, now firm surplus=1/2*2400*(25-13)=14400, worker surplus=(13-8.8)*2400+1/2*2400*(8.8-4)=15840

Deadweight loss=1/2*(13-8.8)*(3000-2400)=1260

c.at $15 /hr demand for labor=2000 and at L=2000,W for supply=8 deadweight loss=1/2*(15-8)*(3000-2000)=3500 so with increase in minimum wage deadweight loss is also increasing