From time to time. Congress has raised the minimum wage. Some people suggested t

Question

From time to time. Congress has raised the minimum wage. Some people suggested that a government subsidy could help employers finance the higher wage. This exercise examines the economics of a minimum wage and wage subsidies. Suppose the supply of low-skilled labor is given by LS= 10w where L is the quantity of low-skilled labor (in millions of persons employed each year), and w is the wage rate (in dollars per hour). The demand for labor is given by LD = 80-10w. What will be the free-market wage rate and employment level? Suppose the government sets a minimum wage of $5.50 per hour. How many people would then be employed? (Enter all responses rounded to two decimal places.) The equilibrium wage is The equilibrium employment level is million people per year. With a minimum wage of $5.50, there would be million people employed.

Explanation / Answer

At equilibrium Ls = Ld so it now 80-10w=10w so w=$4 which is the equilibrium wage. Equilibrium employment level = 10*4 =40 million people per year

if minimum wage increases demand of labour will decrease so Ld = 80-10*5.5 = 25. So 25 million people will be employed.

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