QUESTION 2 (10 Marks) The authority has raised the minimum wage. Some people suggested that a...

QUESTION 2

The authority has raised the minimum wage. Some people suggested that a government subsidy could help employers finance the higher wage. This exercise examines the economics of a minimum wage and wage subsidies. Suppose the supply of low-skilled labor is given by LS = 10w, where LS is the quantity of low-skilled labor (in millions of persons employed each year), and w is the wage rate (in dollars per hour). The demand for labor is given by LD = 80 - 10w.

What will be the free-market wage rate and employment level?

2. Suppose the supply of low-skilled labor is given by LS = 10w, where LS is the quantity of low-skilled labor (in millions of persons employed each year), and w is the wage rate (in dollars per hour). The demand for labor is given by LD = 80 - 10w. Suppose the government sets a minimum wage of $5 per hour.

i). How many people would then be employed?

ii). What is the amount of labour surplus?

3. Suppose the supply of low-skilled labor is given by LS = 10w, where LS is the quantity of low-skilled labor (in millions of persons employed each year), and w is the wage rate (in dollars per hour). The demand for labor is given by LD = 80 - 10w. Suppose that instead of a minimum wage, the government pays a subsidy of $1 per hour for each employee.

i). What will the total level of employment be now?

ii). What will the equilibrium wage rate be?

4. Sketch the graph to illustrate all the answers from a to c

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Expert Solution

Rahul Sunny answered 1 year ago

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