Question

Low-skilled workers operate in a competitive market. The labor supply isQS = 10W (where W is the price of labor measured by the hourly wage) and the demand for labor is

QD =240 – 20W. Q measures the quantity of labor hired (in thousands of hours).

c. What is the deadweight loss of a $9 minimum
wage?
d. How much better off does the $9 minimum
wage make low-skilled workers (in other words,
how much does producer surplus change),
and how much worse off are employers?
e. How do your answers to (c) and (d) change if the
minimum wage is set at $11 rather than at $9

Answer 1

Answer c: When minimum wage is $9 , than

Equilibrium wage

10W= 240-20W

30W= 240

W=240/30= $8

Now at $9

Quantity demanded = 240-20W

Quantity demanded = 240-20($9)= 240- 180= 60 workers

Quantity supplied= 10*( $9)=90 workers

Now there is an excess supply of 30 workers . The dead weight loss of -0.5*(9-8)(30)= -0.5*1*30= - 15

d : Producer surplus has been decreased as now less labour has been hired and more wages paid to the workers.

There is a worse off employer as they suffer from higher wages.

e : Minimum wage = $11

Q _d = 240-20W=240-20(11)= 240-220= 20

Q _s = 10*11=110

Therefore, the deadweight loss has been increased and Producer surplus has been decreased.

Dead weight loss =-0.5(11-8)*90= -90