Question

The market for unskilled labor can be represented by the following supply and demand curves:

DL = 64000 − 4000W SL = −16000 + 6000W,
where the quantity is measured in millions of person hours per year, and W is the wage

in dollars per hour.

1. (a) Calculate the equilibrium price and quantity that would exist under a free market. What impact does a minimum wage of $7.25 per hour have on the market?

2. (b) The government is contemplating an increase in the minimum wage to $15.00 per hour. Calculate the impact of the new minimum wage on the quantity of labor supplied and demanded.

3. (c) Comment on the net effect of the proposed change upon workers as a whole and on individual workers. A good answer will make reference to how laborer surplus changes, and which laborers capture the surplus.

4. (d) New economic research comes to light revealing that the supply and demand for labor were misspecified. The new values are:

   DL = 40000 − 1000W SL = 16000 + 2000W.

   How does this change you analysis? You can answer in generalities, but an excellent answer will delve into the underlying quantitative differences. HINT: Economists love an analytical concept covered extensively in class for application to problems just like this.

Answer 1