4. Minimum wage legislation The following graph shows the labor market in the fa

Question

4. Minimum wage legislation The following graph shows the labor market in the fast-food industry in the fictional town of Supersize City Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly Graph Input Tool Market for Labor in the Fast Food Industry 20 Wage (Dolars per hour) Labor Demanded (Thousands of workers) 18 Supp 16 Labor Supplied (Thousands of workers) 300 200 2 12 10 and 0 50 100 150 200 250 300 350 400 450 500 LABOR (Thousands of workers) In this market, the equilibrium hourly wage is $ , and the equilibrium quantity of labor is thousand workers Suppose a senator introduces a bill to legislate a minimum hourly wage of $8. This type of price control is called a

Explanation / Answer

Solution:

Equilibrium occurs where labor supply equals labor demand (or labor supply curve intersects labor demand curve). Clearly, from the given diagram, this occurs at point where wage rate = $10 per hour, quantity of labor is 250 thousand workers.

If the senator introduces a bill to legislate a 'minimum' hourly wage of $8, this is the minimum wage rate and thus no wage below this rate can be practiced. So, this type of price control is price floor (like giving a lower bound to wage rate).

The table can be completed directly with the help of the diagram:

Also, pressure on wages (without any price controls) is applied in direction of equilibrium wage, since in absence of price controls market naturally get back to equilibrium, no matter from where it starts. Since equilibrium wage rate in the given market is $10, pressure on all wages will be towards $10

We have already established that equilibrium wage rate is $10 here. A price control is binding when it forces the market to not move towards the equilibrium. Thus any minimum wage (price floor) above the equilibrium wage and any maximum wage (price ceiling) below the equilibrium wage is binding, as they never let market reach the equilibrium point. So we can conclude that the given statement is True.

Wage labor demanded labor supplied pressure on wages $14 150 thousand 350 thousand Downward $6 350 thousand 150 thousand Upward

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