Question

Consider the market for labor depicted by the demand and supply curves that follow. Use the calculator to help you answer the following questions. You will not be graded on any changes you make to the calculator.
uppose a senator considers introducing a bill to legislate a minimum hourly wage of $12.50.

Complete the following table with the quantity of labor supplied and demanded if the wage is set at $12.50. Then indicate whether this wage will result in a shortage or a surplus.

Hint: Be sure to pay attention to the units used on the graph and in the table. For example, type in 100,000 for 100 thousand workers.

Wage Labor Demanded Labor Supplied Shortage or Surplus?
(Thousands of workers) (Thousands of workers)
$12.50
Which of the following statements are true? Check all that apply.

Binding minimum wages cause structural unemployment.

In this labor market, a minimum wage of $9.50 would be binding.

In the absence of price controls, a surplus puts downward pressure on wages until they fall to the equilibrium.

If the minimum wage is set at $12.50, the market will not reach equilibrium.

Answer 1

Answer:

Suppose a senator considers introducing a bill to legislate a minimum hourly wage of $12.50.

Wage           Labor Demanded            Labor Supplied

$12.50               375,000                           625,000

This will result in a surplus of labor (625,000 higher than 375,000)

Which of the following statements are true?

• Binding minimum wages cause structural unemployment.  As with all price floors, a deadweight loss results, because the quantity supplied is much greater than the quantity demanded. In this case, the price of labor is the wage, and the deadweight loss = structural unemployment
• In the absence of price controls, a surplus puts downward pressure on wages until they fall to the equilibrium. Since a labor surplus exists, the price of labor should start to decrease in order to match the equilibrium price.
• If the minimum wage is set at $12.50, the market will not reach equilibrium. The quantity supplied of labor is much greater than the quantity demanded for labor resulting in a surplus.