Question

4. Suppose voters choose to increase their state's minimum wage to $6 per hour from $5 per hour. Suppose further that the equilibrium wage in this market would have been $4 per hour. a. Draw the demand and supply curves in this market, and illustrate what would happen to the quantity demanded and supplied of labor under each minimum wage (will there be a shortage or surplus? Under which minimum wage will the shortage or surplus be larger? b. Let’s assume the minimum wage is binding for unskilled workers, and that skilled and unskilled labor are substitutes. Using a demand and supply graph, illustrate what would happen to equilibrium wage and quantity in the market for skilled workers if the minimum wage were to rise to $6 per hour from $5 per hour. (hint: consider shifts in demand or supply) c. If skilled and unskilled workers are instead complements, graph what would happen to equilibrium wage and quantity in the market for skilled workers if the minimum wage were to rise to $6 per hour from $5 per hour.

Answer 1

a) under minimum wage of $5 quantity demanded decreases to l_d and  Quantity supplied increases to l_{​​​​​​s} .

Under the minimum wage of $6 quantity demanded decreases further to l_{​​​​​​​​​​​​}​​​​'_d and quantity supplied increased to l'_{​​​​​s}. There will be a surplus of labor. Under the minimum wage of $6 the surplus would be larger.

B) when minimum wage increases to $6 demand for unskilled labour will fall and as skilled and unskilled workers are substitute due to this demand for skilled workers increases.

This increase will shift the demand curve to the right d' to d'' and there will be a new equilibrium at point b where equilibrium wage of skilled workers increases to w' and equilibrium quantity increases to l'.

C) when unskilled and skilled workers are complements it means they both used together. So when minimum wage increases to $6 it decrease the demand of unskilled labour and simantenously it will decrease the demand of skilled workers due to this demand curve shifts leftward d to d''. This will lead to new equilibrium at point b where equilibrium wage and equilibrium quantity both decreased to w' and l' respectively.