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. Graph Input Tool Market for Labor in the Fast Food Industry Wage (Dollars per hour) Labor Demanded (Thousands of workers) Supply 630 Labor Supplied (Thousands of workers) WAGE (Dollars per hour) 0 0 180 270 360 450 540 630 720 810 900 LABOR (Thousands of workers)

Answer 1

Ans) At equilibrium, quantity demanded = quantity supplied. And the price at this intersection is known as equilibrium price and quantity corresponding to this point is known as equilibrium quantity.

In this market, equilibrium hourly wage is $10. And equilibrium quantity is 450 thousand labour.

A bill proposing that at least this much amount must be given, is known as price flooring. Meaning that a wage above it can also be given but at minimum that amount must be given. Example of price flooring is minimum wage. On contrary, in price ceiling, a cap is put, i.e no body can charge above that amount, however, lower amount can be accepted. Example of price ceiling is rent control.

So here it is Price flooring.

At wage of $12,

Quantity demanded = 360 thousand

Quantity supplied is = 630 thousand of labour

So there is excess supply of 630-360= 270 thousand labour.

Here there will be downward pressure on the wages.

At wage of $8,

Quantity demanded = 540 thousand of labour

Quantity supplied = 225 thousand of labour (please note that this number can slightly vary as the intersection point is not clear and is between 180 and 270. When you will click on the graph, it will show the exact value)

Here there will be upward pressure on the wages.

Price above equilibrium price Equilibrium Price below equilibrium price

3) A price floor is binding only when it is above equilibrium. Since in this market the equilibrium wage is $10, any minimum wage above this price will be binding. So answer is False.