Chapter 8, Problem 1FRQ

a)

To determine

The question requires us to determine the equilibrium wage and quantity of workers.

Explanation of Solution

In a market, the equilibrium point can be determined at the intersection of supply and demand curves. The corresponding price and quantity are known as equilibrium price and equilibrium quantity respectively.

In the given figure, point E represents the equilibrium state in the labor market where,

Equilibrium wage = $6 per hour

Equilibrium quantity = 1800 workers.

b)

To determine

The question requires us to determine the minimum wage the government could set.

Explanation of Solution

The minimum wage is a price control method used by the government to protect labor from exploitation and to bring the market into a required shape. In this method, the government sets a wage that is above the equilibrium wage in the labor market.

The government usually sets price-controlling methods to safeguard the marginal group or a specific group, but these methods result in various types of inefficiencies in the market.

Therefore, the government should set a minimum wage anywhere above the equilibrium wage for it to have an impact on the market.

c)

To determine

The question requires us to determine the supply of labor, demand for labor, number of workers who want to work and who do not want to work, and number of unemployed workers when the government set a minimum wage at $8.

Explanation of Solution

At the minimum wage:

The quantity supplied in the labor market will increase from 1800 workers to 2600 workers. The number of workers demanded will fall from 1800 workers to 1000 workers.

Surplus of workers = quantity supplied − quantity demanded

Surplus of workers = 1600 workers

Therefore, when the government set a minimum wage of $8 per hour:

1. 2600 workers are willing to supply their labor.
2. Only 1000 workers would be hired.<
3. 800 workers (= 2600 − 1800) would like to work but didn’t like to work at the equilibrium wage.<
4. Previously 1800 workers were employed. So, 800 workers (= 1800 − 1000) would no longer have a job