Using the neoclassical theory of distribution, predict the impact on the real wage and the real...

Using the neoclassical theory of distribution, predict the impact on the real wage and the real rental price of capital of the following question.

The government tries to improve the welfare of workers by imposing a binding minimum wage (i.e. a wage floor above the wage that would prevail in the absence of such a policy).

MAKE SURE TO SHOW THE GRAPH

Solutions

Expert Solution

Imposition of minimum wage in the labor market will lead to excess amount of labor supplied at minimum wage w' in comparison to the amount of labor demanded. This leads to unemployment problem in the labor market. Also, producers will try to substitute capital for labor and increase their demand for capital which leads to increase in the price of capital or interest rate in the capital market, This is depicted in the diagram below:

Rahul Sunny answered 1 year ago

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