From time to time, Congress has raised the minimum wage. Some people suggested t
ID: 1189224 • Letter: F
Question
From time to time, Congress has raised the minimum wage. Some people suggested that a government sibsidy 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 LS 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? (Round answer to two demal places.)
a. The equilibrium wage is $___
b. The equilibrium employment level is $___
c. With a minimum wage of $5.50, there would be ___ million people employed.
Explanation / Answer
a) At equilibrium LD = LS therefore 10w = 80 - 10w which is equal to 20w = 80 so w = $4 which is also the equilibrium wage rate
b) Equilibrium employment level = 10*4 = 40 million
c) At w = $5.5 now LD = 55 million and LS = 25 million so LS being lower that will be the answer i.e. 25 million people will be employed
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