Equilibrium wage rate
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Suppose that there are two states (A and B) in a country. Workers can freely move from one state to the other and all labor is equally skilled.
a) Depict graphically the two market equilibrium, clearly labeling the wage (use WA and WB) and employment that clears each market.
b) If a country-wide minimum wage (WM) is set in both states such that Wm < WA, what will be the relationship between WM and WB? What will be the effect of such a wage requirement on the labor markets in the two states?
c) Suppose state A decided to set their own minimum wage requirement (WMA) such that WMA > WA. Describe what would occur in the labor markets of the two states.
d) After the markets adjust, suppose the wage rate that clears the labor market in state B is $20 and the minimum wage in state A is $25. What is the probability that a person living in state B who wanted to find a job in state A would be able to get employment?
(please see attached file)
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Solution Summary
Depict graphically the two market equilibrium, clearly labeling the wage (use WA and WB) and employment that clears each market and other features.
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