Question

In: Economics

In order to reduce unemployment for low-skilled or inexperienced workers, the province of India uses a...

In order to reduce unemployment for low-skilled or inexperienced workers, the province of India uses a wage subsidy program for employers. You’re working for the provincial government in India and you estimate that when no subsidy is in place, the demand for low-skilled labor in India is given by P=22-Q and the supply of low-skilled labor is P=10+2Q, where Q is the number of hours worked in a day.

a) Provide your supervisor with the equilibrium price and quantity. Use algebra and plot the demand and supply curves, showing the initial equilibrium, on a graph.

b) You estimate that the demand curve incorporating the wage subsidy to employers is given by P=25-Q. Explain its consequence. Use algebra and a new graph to show the new situation. Clearly identify the cost to the employers, the wage paid to the workers and the size of the subsidy

(c) What are the costs for the government for this wage subsidy program?

d) A think tank states that a minimum wage at P=$20 would be a better policy option for lowskilled workers in India. Again, use algebra and a new graph to clearly assess this claim. Explain why this result was predictable using your knowledge of basic economic theory

Solutions

Expert Solution

A) When no subsidy is given equilibrium is when demand is equal to supply

22-Q=10+2Q (1)

from equation (1) 3Q=12 which means Q=4

putting value of Q in demand equation p=22-4=18

p=18

equilibrium price =18 and equilibrium quantity is 4

B) equilibrium when subsidy is given

New demand incorporating subsidy = supply

25-Q=10+2Q (1)

from equation (1) 3Q=15 which means Q=5

putting value of Q in demand equation p=25-5=20

p=20

equilibrium price =20 and equilibrium quantity is 5

C) government subsidy = final total wage(after subsidy) -initial total wage

government subsidy=20*5-18*4=28

D)if the wage is fixed at 20 then quantity is found out putting value 20 in deman equation

20=25-Q

Q=5

so it is similar to a condition when subsidy is given

This result is predictable because when wage rate is same then under perfect competitive market it will give a same quantity

Rahul Sunny answered 1 year ago
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