Question

The supply curve of work requiring a high school degree or less is Q_S = - 13,000 + 2000P and the demand for such work is Q_D = 11,000 - 1000P. Assume this is a competitive market.

a) What is the market wage and quantity?

b) What quantity is hired if a minimum wage of $10 is imposed? What is the deadweight loss (DWL) of this policy?

c) Instead of a minimum wage, policymakers introduce a $1.5 wage subsidy (think EITC). What is the quantity of work supplied under this policy? What is the DWL of this policy?

d) What percentage of the subsidy is captured by the employers? (Hint: the buyer's burden is represented by ϵ S ϵ S − ϵ D)

Answer 1

a) Equilibrium occurs when demand = supply

-13,000 + 2,000P = 11,000 - 1,000P

P = 8

At this Price, labor hired = 3,000

b) If there is minimum wage of $10, labor demanded is 7,000 while labor supplied is 3,000. Deadweight loss is the area of portion A + B whose sum is (1/2) * (3,000 - 1,000) * (10 - 7) = 3,000

c) If there us subsidy of $1.5, quantity of worker supplied under subsidy is 4,000. Deadweight loss under subsidy is area of shaded portion whose sum is (1/2) * (4,000 - 3,000) * (8.5 - 7) = 750

d) Benefit on subisdy falls on employers as well as on employees as per their elasticity. It falls in the ratio of (point at which demand curve touch price axis - equilibrium price) to (equilibrium price - supply curve touching price axis) = (11 - 8) / (8 - 6.5) = 3 / 1.5 = 2 / 1

Two third (66.67%) of the subsidy goes to employers while one third (33.33%) goes to employees. Thus, wage employers pay falls to $7 while wage employees receive rises to $8.5.