Question

LinkedIn opens a new office in Los Angeles. At the same time, a new minimum wage is implemented in Los Angeles that increases wages of all workers. What happens in the local coffee shop market to demand, supply, and equilibrium price and quantity? (Hint: software engineers work long hours and need caffeine and coffee shops hire workers at low wages that are affected by the change in regulation.)

Answer 1

Answer:

When the minimum wage rate is increased by the government by intervention, this means that the coffee company now has to pay more salaries to the employees/workers of the coffee shop. Since cost cutting is one of the main areas of focus of every other company, the coffee shop would try to lay off its workers and that would ultimately result in unemployment. For example, if the coffee shop was paying $50 in total to 10 workers($5 per worker), now as per the new regulation it would still pay $50 in total but to only 7 workers($7 per worker), this means that the coffees shop has unemployed 3 workers due to this. Hence the demand would still be the same for the coffee shop as caffeine is a necessity for the software engineers who work long. Other than that, the supply would also be not really affected but the equilibrium point can be affected as the coffee shop can raise the price of coffee due to the minimum wage payment to its workers.

Hope you understand the point here. Good Luck.