Question

With the use of a carefully labeled diagram illustrate the concept of a minimum wage?

With the use of a carefully labeled diagram illustrate the concept of a minimum wage?

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Answer #1

Since the price floor is the legal minimum price which can be charged and it is set above the equilibrium price. It leads surplus of workers. Minimum wage is the example of price floor.

A binding price floor is set above the equilibrium wage rate.

As it can be seen in the diagram that when the demand and supply of labor curve intersects, then the equilibrium wage rate was W0 and quantity of labor was Q0.

But when the minimum wage is imposed, then it is set above the equilibrium wage rate and new wage rate is W1 and at this wage rate the quantity demand for labor is Q1 and quantity supplied of labor is Q2. It means due to minimum wage rate, there will be surplus of labor in the market.

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