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How do you calculate the free market wage rate given the labor supply and demand functions?

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In 1996 Congress raised the minimum wage from \$4.25 to \$5.15 per hour. Some people suggested that a government subsidy could help employers finance the higher wage. This exercise examines the economics of a minimum wage and wage subsidies IN A MAKE-BELIEVE COUNTRY.

Suppose the supply of low skilled labor is given by LABOR SUPPLY = 10*w millions where w is the wage rate [in dollars per hour]. The demand for labor is given by LABOR DEMAND = 80 - 10*w millions.

a) What will be the free market wage rate and employment level?

b) Suppose the government sets a \$5.00 per hour minimum wage. What will be the employment level?

c) Suppose the government pays a subsidy of \$1 per hour directly to the employee. What will be the market wage and employment level? How much will the government pay per week [suppose every laborer works 40 hours].

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Solution Preview

Please see the attached file.

In 1996 Congress raised the minimum wage from \$4.25 to \$5.15 per hour. Some people suggested that a government subsidy could help employers finance the higher wage. This exercise examines the economics of a minimum wage and wage subsidies IN A MAKE-BELIEVE COUNTRY.

Suppose the supply of low skilled labor is ...

Solution Summary

The solution explains how to calculate the wage rate and employment level in the free market, with a minimum wage and with a subsidy. Calculations and answers are provided in plain text and in an attached Word document.

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