Question

3. Former Presidential Candidate John Kerry suggested increasing the minimum wage to $7.00/hour. Economists have estimated the demand and supply curves for low-skilled labor as:

LD =100−4w LS =16w,

where L is the number of low-skilled workers and w is the wage rate.

3a) What is the equilibrium wage and level of employment in the market? Provide a detailed diagram to support your answer.

3b) Calculate the producer surplus workers receive and the consumer surplus that employers receive. Label these in the diagram you created in part A.

3c) How many low-skilled workers will be hired if the minimum wage is set at $7.00?

Illustrate the effect of the minimum wage on your diagram.
3d) What is the change in consumer and producer surplus associated with the minimum

wage?

Answer 1

A) Equilibrium is at where, Ld= Ls

100-4w=16w

W=100/20=5

L=16*5=80

B) Producer surplus=1/2*80*5=40*5=200

Inverse Labour Demand:W=25-0.25L

Consumer surplus=1/2*80*(25-5)=40*20=800

C)The labour demand at W=7

Ld=100-4*7=72

D)New consumer surplus=1/2*72*(25-7)=36*18=648

Change in consumer surplus=648-800=-152

Inverse supply:W=L/16

When L=72, W=72/16=4.5

New producer surplus=(7-4.5)*72+1/2*72*4.5=3.5*72+36*4.5=414

Change in producer surplus=414-200=214