Question

Consider the following demand and supply equations in the market for labour. Supply: W = 10...

Consider the following demand and supply equations in the market for labour. Supply: W = 10 + (1/3)L Demand: W = 1, 000 − (2/3)L Show your work as you respond to the following questions.

(a) What is the market equilibrium wage and quantity?

(b) The government implements a minimum wage of W = 370. What is the Consumer Surplus?

(c) Calculate the Producer Surplus under a minimum wage of W = 370.

(d) Find the Deadweight Loss under a minimum wage of W = 370.

(e) What is the Labour Surplus under a minimum wage of W = 370?

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Homework Answers

Answer #1

(a)  market equilibrium wage = $340; quantity of labor = 990
Market equilibrium: 10+ (1/3)L = 1000-(2/3)L
so, L = 990; W = 340

(b) When minimum wage = $370,
Consumer surplus = ½*(1000 - 370)* 945 = 297,675

(c) Producer surplus = $194,400
PS = ½*(370 - 10)*1080 = 194,400

(d) Deadweight loss = $2,025
DWL = ½*(370 - 340) * (1080-945) = 2025

(e) Labor surplus = 135
Surplus = Labor supply - Labor demand
Labor supply 370 =  10 + (1/3)L; so, L = 1080
Labor demand: 370 = 1000- (2/3)L; so, L = 945
Surplus = 1080 - 945 = 135

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