Q6) Assume low-skilled workers operate in a competitive market. The labor supply
ID: 1141844 • Letter: Q
Question
Q6) Assume low-skilled workers operate in a competitive market. The labor supply is 0S 10W (where W is the price of labor measured by the hourly wage) and the demand for labor is: Q 240 20W Q measures the quantity of labor hired (in thousands of hours). a) What is the equilibrium wage and quantity of low-skilled labor working in equilibrium? b) If the government passes a minimum wage of $10 per hour, what will be the new quantity of labor hired? Will there be a shortage or surplus of labor? How large? c) What is the deadweight loss of this price floor? d) How much better off are low-skilled workers in this case (i.e, how much does producer surplus change) and how much worse off are employers (i.e, how much does consumer surplus change)?Explanation / Answer
a)
Qs = 10W
Qd = 240 - 20W
Equilibrium:
10W = 240 -20W
30W = 240
W = 240 /30
= 8
Q = 10*8
= 80
b)
Qs = 10*10
= 100
Qd = 240 - 20 (10)
= 240 - 200
=40
Surplus Supply = 100 - 40
= 60
c)
40 = 10W
W = 4
DWL = 0 .5 ( 40) ( 10 -4)
= 0.5 (40)(6)
= 0.5(240)
= 120
d)
Worker Old Surplus = 0 .5( 8) (80)
= 320
New surplus of worker = (6)(40) + 0.5(4)(40)
= 240 + 80
= 320
Change = 320 - 320
= 0
Old Firm Surplus = 0.5(12-8)(80)
= 0.5 (4)(80)
= 0.5(320)
= 160
New Surplus of firm = 0.5(12 -10)(40)
= 0.5(2*40)
= 40
Change in surplus = 40 - 160
= - 120
Surplus fall by = 120
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