Question

2. The federal minimum wage was last increased from $6.55 to $7.25 per hour. Suppose that the elasticity of labor supply of teenagers is 0.15. Using this estimate, by what percent would you expect teenagers’ quantity of labor supplied to change in response to the change in the minimum wage? (For simplicity, assume that all teenage workers receive the minimum wage.) Show your work.

Answer 1

Answer is Percentage increase in quantity of labouor supplied is 1.52%

The explanation is as follows:

Original wage rate: $ 6.55 per hour

Revised wage rate: $ 7.25 per hour

Average wage rate: ($6.55 +7.25) /2 = $ 6.90 per hour

Increase in Labour rate: $ 0.70 per hour ($ 7.25 - 6.55)

Percentage increase in wage rate: 0.70 / 6.90 *100 = 10.15%

Price elasticity of Labouor supply = 0.15

Price elasticity of supply = Percecntage increase in labour supplied/ percentage increase in wage rate

0.15 = Percentage increase in Labour supplied / 10.15%

Therefore, the perentage increase in Quantity of labour supplied: 0.15 *10.15% = 1.52%