Q16. In the competitive model of the aggregate labour market, the imposition of a minimum real...

Q16. In the competitive model of the aggregate labour market, the imposition of a minimum real wage that is greater than the competitive real wage will:

(a) Make all labour force participants better off

(b) Make all labour force participants worse off

(c) Force businesses to pay a real wage that is greater than the marginal product of labour

(d) Result in an excess demand for labour

(e)None of the above

Q19. In the competitive model of the labour market, the elimination of all existing taxes on labour will cause:

(a) an increase in the real wage received by workers

(b) a decrease in the real wage paid by businesses

(c) an increase in aggregate employment

(d) all (a), (b) and (c)

(e) both (a) and (c)

Expert Solution

16. When the labour market is in equilibrium the Marginal Revenue Product of Labour equals the prevailing wage rate. But a binding wage rate above the competitive equilibrium compels the firms to pay a wage which is higher than the marginal revenue product of labour. The labour market equilibrium occurs when MPL/PL=MPK/PK. But a minimum wage above the equilibrium results in MPK/PK>MPL/PL.

Answer: c. Force business to pay a real wage that is greater than the marginal product of labour.

19. The elimination of taxes on labour increases the real wage of workers. As the real wage increase the labour force participation rate also increase. Thus aggregate employment increases.

Answer: e, both (a) and (c).

Rahul Sunny answered 2 years ago

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