ADDITIONAL INFORMATION: L D = 1,000 - 5 w , where w is the wage. L S = 200 +30 w

Question

ADDITIONAL INFORMATION:

LD = 1,000 - 5w, where w is the wage. LS = 200 +30w. The equilibrium wage and hours worked are given by w* = 10, L* = 500.

QUESTION:

Consider the same labor market as above, but now assume that the government enforces a minimum wage law. The new minimum wage is given by w = 12. In this economy, the unemployment rate is:

a) 20.5 percent

b) 28.5 percent (correct answer)

c) 10.7 percent

d) Zero. In the standard demand and supply model of the labor market there is no unemployment

I am unsure how the unemployment rate was calculated, thank you!

Explanation / Answer

b) The unemployment is 28.5 percent.

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