Question

If supply of and demand for unskilled labour are both elastic, we can predict that the unemployment created by the binding minimum wage will be relatively _____, and deadweight loss created _____.

Select one:

a. large; large as well.

b. small; large

c. large; small

d. small; small as well.

e. we need more information before we can predict the effect of a minimum wage

Answer 1

If supply of and demand for unskilled labour are both elastic then the binding minimum wage will create more unemployment because as a result of minimum wage the employers will reduced their demand largely because of the the elastic unskilled labour demand.

When the unemployment created by the binding minimum wage will be relatively higher because of the elastic supply of and demand for unskilled labour, the dead weight loss created would be large as well.

Hence, if supply of and demand for unskilled labour are both elastic then we can predict that the unemployment created by the binding minimum wage will be relatively large and that weight loss created would be large as well.

Hence, option a is correct i.e, Large; large as well.