Question

write a paragraph addressing question below and create a basic graph describing

Suppose that the U.S. government increases the legal minimum wage. Assume that most of the workers employed in the production of coffee are paid the legal minimum wage rate.

• Will this affect the supply or the demand for coffee? Why?

• Which determinant of demand or supply is being affected?

• Create a graph with before- and after-curves on the same axes.

• How will this change the equilibrium price and quantity of coffee, assuming all else remains unchanged? Explain your reasoning.

Answer 1

If minimum wage increases, this increases the production cost, so coffee farmers decrease production. This decreases market supply, shifting supply curve leftward, increasing price and decreasing quantity of coffee.

The determinant of supply that is affected is Change in Production Cost (Input price).

In following graph, D0 and S0 are initial demand and supply curves intersecting at point A with initial equilibrium price P0 and quantity Q0. When supply of coffee decreases, S0 shifts left to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.