Congress has raised the minimum wage. A government sibsidy could help employers
ID: 1189304 • Letter: C
Question
Congress has raised the minimum wage. A government sibsidy could help employers finance the higher wage. Suppose the supply of low-skilled labor is given by:
LS = 10w
where LS is the quantity of low-skilled labor (in millions of persons employed each year), and w is the wage rate (in dollars per hour). The demand for labor is given by:
LD = 90- 10w
What will be the free-market wage rate and employment level? Suppose the government sets a minimum wage of $5.50 per hour. How many people would then be employed? (Round answer to two demal places.)
The equilibrium wage is $___
The equilibrium employment level is ___ million people per year.
With a minimum wage of $5.50, there would be ___ million people employed.
Explanation / Answer
At equilibrium, Labor supply and labor demand is equal.
LS = LD
10w = 90-10w
20w= 90
Equilibrium wage is $4.50.
Equilibrium employment level
LS = 10 x4.50 millions
= 45 millions
At minimum wage of $4.50, labor supply will be:
LS = 10x5.5 = 55 million
Labor demand will be
LD = 90 – 10x5.5
= 35 million
Therefore, there is only 35 million labor are demanded whereas supply is 55 million, hence only 35 million labor can only be employed.