Chapter 13R, Problem 2FRQ

a)

To determine

The question requires us to draw a graph representing the labor market and hotel, and correctly label the given variables.

Explanation of Solution

In a perfectly competitive market, the labor market represents the relationship between the number of workers demanded and supplied at a given wage rate with the help of the labor supply curve and labor demand curve.

The labor supply curve and demand curve in the market is relatively flatter than the individual firm’s curve. The following two graphs represent the:

• The labor market in the competitive market structure (left side diagram)
• Individual firm’s supply curve (right side diagram).

  

In the left side diagram, the intersection of the labor supply curve (Ls) and labor demand curve (Ld) shows the equilibrium in the market which is at point E, where

• W_E are the equilibrium wage rate
• Q_E1 is the equilibrium quantity of workers demanded and supplied in the labor market.

At the market wage, Q_E1 number of workers is available in the market. Thus, the firm will hire a proportion of the market supply of workers at the market wage.

Here, SH represents the supply curve of the hotel. At the given wage, the hotel will hire a Q1 number of workers.

b)

To determine

The question requires us to show the impact of a minimum wage on the labor market using the graph.

Explanation of Solution

When the government sets a minimum wage above the equilibrium wage, the labor market will face a surplus of workers. At the higher wage, more people will prefer to work, but at the same time, the hotel will lower the demand for the workers as higher wage increases the costs of production. The following graph shows the impact of a minimum wage on the labor market.

  

Due to a minimum wage policy,

• $W_{Min}$ is the new equilibrium wage.
• At this higher wage, the labor market will demand $Q_{E2}$ number of workers.
• At this higher wage, the labor market will hire $Q_2$ number of workers.