ECON 6501 - Suppose that the market for labour

1. Suppose that the market for labour is a competitive market and can be described by the following demand and supply curves:

D = 120,000 – 5,000W

S = 5,000W – 60,000

Where W = wage rate per hour for labour

(a) Calculate the equilibrium wage rate and quantity of labour employed and draw a diagram to illustrate your answer.

(b) Show on your diagram and calculate the size of the:

(i) Consumer/firm surplus

(ii) Producer/worker surplus

(iii) Economic Surplus

Note: the economic surplus is equal to the sum of consumer surplus and producer surplus.

(c) Suppose that the government imposes a minimum wage of $20.00 per hour.

(i) How many workers are now employed?

(ii) Calculate the amount of the surplus or shortage of workers created by the imposition of the minimum wage.

(d) Calculate the size of the (i)consumer/firm surplus (ii) producer/worker surplus (iii) economic surplus and (iv) deadweight loss following the introduction of the minimum wage $20.00 per hour.

(e) Following the introduction of the minimum wage explain if:

(i) Firms are better off?

(ii) Workers are better off?

(iii) Society is better off?