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Assume that the minimum wage has just been increased by 25%. Explain briefly why each of the following statements is true, false, or uncertain from an economic perspective.

Assume that the minimum wage has just been increased by 25%. Explain briefly why each of the following statements is true, false, or uncertain from an economic perspective.

  1. If a company cannot increase the prices of the products it sells, it will absorb the wage increase (and continue operating & employing workers at the higher wage) as long as it can still earn positive economic profits after doing so.

  2. If a company cannot increase the prices of the products it sells, it will absorb the wage increase (and continue operating) as long as it can still earn positive accounting profits after doing so.

  1. Once this new law is in effect, some firms might find it advantageous to replace workers with machines.

  1. We should be able to quantify the negative effects (if any) of this law on unemployment quickly, probably within the first two to three months.

Solutions

Expert Solution

  1. If a company cannot increase the prices of the products it sells, it will absorb the wage increase (and continue operating & employing workers at the higher wage) as long as it can still earn positive economic profits after doing so. FALSE. Reason: According to profit maximization condition, it will employ less labor.
  2. If a company cannot increase the prices of the products it sells, it will absorb the wage increase (and continue operating) as long as it can still earn positive accounting profits after doing so. TRUE. Reason: According to profit maximization condition, it will employ less labor but will continue its operations.
  1. Once this new law is in effect, some firms might find it advantageous to replace workers with machines. TRUE. Reason: According to profit maximization condition, it will employ less labor and more of capital.
  1. We should be able to quantify the negative effects (if any) of this law on unemployment quickly, probably within the first two to three months. FALSE. Reason: It takes time to impact real variables like unemployment.

Rahul Sunny answered 2 years ago
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