ADDITIONAL INFORMATION: LD = 1,000 - 5w, where w is the wage. LS = 200 +30w. The

Question

ADDITIONAL INFORMATION:

LD = 1,000 - 5w, where w is the wage. LS = 200 +30w. The equilibrium wage and hours worked are given by w* = 10, L* = 500.

QUESTION: Consider the same labor market as above, but now assume that the government enforces a minimum wage law. The new minimum wage is given by w = 12. In this economy, the unemployment rate is:

a) 20.5 percent

b) 28.5 percent (correct answer)

c) 10.7 percent

d) Zero. In the standard demand and supply model of the labor market there is no unemployment

I am unsure how the unemployment rate was calculated, thank you!

Explanation / Answer

The correct LD = 1,000 - 50w, wrongly mentioned in your question as LD = 1,000 - 5w

At w= 12 Ld = 1000-50*12 = 400 and Labor Supply = 200+30*12 = 560

The unemployed will be = 560-400 = 160

The ration of unemplyment = unemployed / total supply of labor = 160/560 = 28.57

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