The following graph presents a hypothetical equilibrium for the labor market for

Question

The following graph presents a hypothetical equilibrium for the labor market for fast food workers. Which of the following may occur if employers must start paying a minimum wage above 5.57? Select all that apply. You can move the orange line on the graph below to simulate various price movements, but the graph is not graded. Be sure to but either "may occur" or "will not occur" by each statement. Labor demand fails Producers surplus rises Producers surplus fails Total firm profits rise The quantity of labor demanded rises

Explanation / Answer

1. Labor demand falls: May occur (Explanation: When minimum wages increases, the demand for labor decreases. This is the application of law of demand.)

2. The producer surplus rises: May occur (Explanation: Initially at equilibrium price PS is: ($5*5) /2 = $12.5. Take fer example the minimum wage increases to $7. Then the PS = [ ($7-$3)*3 + ($3*3) / 2] = $16.5)

3. The producer surplus falls: May not occur

4. Total firm's profit rise: May occur. (Explanation: Because the minimum wage rises, it means the Total cost of procuction rises which leads to decreases in profit)

5. The quantity of labor demanded rises: May no occur (Explanation: Since the relationship between wage rate and quantity of labor demanded is negative, it means when wage rate increases, the demand for labor falls.)

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