Question

1. With the aid of a fully labelled diagram, explain the difference between the government enforcing a minimum wage below the equilibrium wage rate, and the government enforcing a minimum wage above the equilibrium wage rate
2.With the aid of a fully labelled diagram, explain what would happen in the market for Ricoffy coffee if the price of Frisco coffee increase s ceteris paribus
3. With the aid of diagrams, discuss the five different categories of price elasticity demand
4.Give an outline of the differentiating characteristics of perfect competition and a monopolistic market structure
5.Discuss the profit maximizing position of a monopolistic, in both the short run and the long run ( 10 Marks)

Answer 1

1).

Consider the given problem here “Ld” be the demand for labor and “Ls” be the supply of labor and “E1” be the equilibrium, => the equilibrium wage and employment are given by “W1” and “L*” respectively.

Now, if a minimum wage of “W2 < W1” is enforced, => at this wage “Ld > Ls”, => wage will increase to “W1” and the employment will be “L*”, => if the minimum wage below the “W1” is enforced, => the wage will not be binding, => the “W” will increase to “W1”.

Now, if a minimum wage (W3) above the equilibrium is enforced implied “Ls > Ld”, => there will be an excess supply in the labor market, => “W” will decrease to “W1” but as it is fixed at “W3” it can’t decrease, => unemployment will persist in the labor market.