Question

WAGE $10 QUANTITY OF LABOR 8,000 10,000 12,000 The accompanying graph shows the economy of Sanderston. With no minimum wage law, identify the equilibrium wage and the equilibrium quantity of labor. Now, assume that a binding minimum wage law at $15.00 is enforced. Does this result in a shortage or surplus of labor? Calculate the amount. Does the situation described in the graph show an increase in unemployment or a decrease? Is the minimum wage law good or bad for the economy of Sanderston?

Answer 1

1) When there is no minimum wage , the equilibrium quantity would be 10,000 units of labour and the equilibrium wage would be $10.

Now if the binding minimum wage is imposed at $15, it would create a surplus of labour. This is because at a higher wage, there would be more labour supply but less labour demanded. This would create a surplus of labour by (12000-8000)=4000 units of labour.

This would cause an increase in unemployment because earlier 10000 units of labour were employed but now only 8000 are employed. This has increased the unemployed.

Hence a minimum wage is not a good idea in this economy.

2) This situation describes that there are less parking spots. This means that the demand is more than the supply and also that supply is constant. This would be the case when the price of parking is lower than the market equilibrium and there is excess demand.

If the price is lower , there would be more demand which would mean not everyone would have the parking space.

The price should be increased. This would lead to less demand because there is inverse relation between Price and demand and hence would reduce the people who want to park. This would lead to equilibrium wherein there would be no surplus or shortage of demand.

The price change would shift the demand curve to left ie decrease the demand and the market would be in equilibrium.