Question

The following graph shows the labor market in the fast-food industry in the fictional town of Supersize City.

Answer 1

• In this market, the equilibrium hourly wage is $10, and the equilibrium quantity of labour is 450 thousand workekrs.

Reason: An equilibrium in the labour market is when the demand curve for labour and supply curve for labour intersect. Equilibruium wage is the wage at which demand equals supply. At $10 per hour, the quantity of labor that workers are willing to supply is equal to the quantity of labor firms demand (450,000 workers).

• Suppose a senator introduces a bill to legislate a minimum hourly wage of $ 6. This type of price control is called a a price floor.

Reason: A minimum price set by legislation is called a price floor, while a maximum price set by legislation is called a price ceiling. A minimum wage law is one example of a price floor because a wage is a sort of price.

For each of the wages listed in the following table, determine the quantity of labor demanded, the quantity of labor supplied, and the direction of pressure exerted on wages in the absence of any price controls.

Wage (Dollar per hour)	Labour demanded (thousands of workers)	Labour Supplied (thousands of workers)	Pressure on Wages
12	180	720	Downward
8	630	180	Upward

Reason: At a wage of $12 per hour, only180,000 workers are demanded by firms, but 720,000 workers require a job. Therefore, there is a surplus of 540,000 workers. In the absence of any price controls, a surplus puts downward pressure on wage until surplus is eliminated, that is; until equilibrium is re-established.

At a wage of $8 per hour, 630,000 workers are demanded by firms, but only 180,000 workers need a job. Therefore, there is shortage of 450,000 workers. In the absence of any price control, a shortage puts an upward pressure on wages shortage is eliminated and equilibrium is re-established.

A minimum wage above $10 per hour is a binding minimum wage in this market.

Answer: True.

Reason: A minimum wage is a binding minimum wage if it is set above the equilibrium wage. In this case $ 10 is the equilibrium minimum wage and thus a above $ 10 is a binding minimum wage.