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Using Isoquant-Isocost Analysis

Many economists believe that an increase in the minimum wage leads to unemployment. Critics point out that the last time the minimum wage went up the same dire predictions from economists were made, the fact is that there are more people employed today than before the minimum wage increase. Using isoquant-isocost analysis, graph this situation and explain how it may be possible for increases in the minimum wage to have little impact on employment levels.

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Please refer to the attachment.
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<br>1. This is possible in the above figure. The straight lines are isocost and the curves are isoquants. When minimum wage is imposed, the "price" for labour input is increased, and the budget line (isocost) pivots in and the firms have to adapt to a lower level isoquant Y2.
<br>However, at the new equilibrium, the employment level is increased from L1 to L2, resulting ...

Solution Summary

Using isoquant-isocost analysis, graph this situation and explain how it may be possible for increases in the minimum wage to have little impact on employment levels.

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