Question

Consider a very simple labor market that can be described by the following equations. Qd=81-4w and Qs=-63+5w. A. The government decides to set the minimum wage to $15.50 per hour, what will happen to this market? (2.5pt) B. What happens to this market if the government decides to raise the minimum wage to $17.50 dollars? (2.5pt) FILL IN THE BLANK BOXES (Show all work on graph; use insert shapes to add lines, etc) (5pt)

Answer 1

A) This wage is not binding. Note that at equilibrium we have

81 - 4w = -63 + 5w

144 = 9w

w = 144/9 = 16

Since equilibrium wage is already higher than the minimum wage, it is not binding. Market wage will still be 16.

B) At W = 17.50, Qd = 81 - 4*17.50 = 11 units and Qs = 24.50 units. Hence at this wage rate, there is unemployment of 13.50 units.

The figure is labelled below. Vertical intercepts are 81/4 = 20.25 for labor demand and 63/5 = 12.60 for labor supply. Horizontal intercept for labor demand is 81.

Wage 20.25 126 17 81 Labot