Question

6. Consider diagram below, which illustrates the market for low skilled labor. $/hr - NWC 2 4 6 8 10 12 14 16 18 Q (thousands of workers) If the government introduces a minimum wage law set at $9 per hour, then, in the new equilibrium, which of the following statements is TRUE? 1. There will be 11,000 workers willing to work who cannot find work, given the wage. II. The number of workers employed will decrease by 11,000. III. The number of workers that employers are prepared to hire will decrease by 5,000. a) I only. b) I and II only. c) I, II, and III. d) I and III only. 7. Suppose that the BC government wishes to reduce the quantity of beer sold in the Province by 20%. It has calculated that this goal can be achieved EITHER through a price floor set at $2 per six-pack of beer OR a price ceiling of $20 per six-pack of beer. Assume that the current price of beer is $10 per six-pack. Which of the following statements about these policies is TRUE? a) The deadweight loss from the price floor will be greater than the deadweight loss from the price ceiling. b) The deadweight loss from the price ceiling will be greater than the deadweight loss from the price floor c) There is insufficient information to determine which policy will have the large deadweight loss. d) None of the above statements is true.

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Answer 1

ans 6=option d

If the NMW is greater than market clearing wage rate for a specific job, then demand will contract & supply will escalate. The contraction of demand is the outcome of a combined income & substitution impact in response to the greater wage rate. In other words, at a greater wage rate the company's income, its profitability, will, ceteris paribus, diminish & the company will lessen demand, thus the income impact. The substitution impact implies that at a high wage level companies will look to substitute labour when they can, for other employees or with capital. One of the reasons the minimum wage rate is fixed for all workers is to lessen the substitution impact, & make the demand for workers more inelastic.

On the supply-side the greater wage will encourage existing personnel to supply more labour, or it will encourage labor out of voluntary unemployment.