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Unformatted text preview: C 2 wU U wc F 1 MR LF LU C wF D = MRP Lc L 69 HOMEWORK 1. Suppose a consumer has preferences over consumption and leisure that are represented by the following utility function: U(c , ) = 1/2ln c + 1/3 ln Find the consumer's demand functions for consumption, c*, and leisure, * in terms of P, w, and Tbar. 70 ECON 301 LECTURE #5 Minimum Wages Another labour market imperfection can arise through the imposition of minimum wages into an otherwise competitive labour market. In the early proliferation of minimum wages as a conceptual framework, it was thought of and intended as an appropriate policy instrument to alleviate poverty and to protect workers from exploitation. In the past few decades, researchers have determined that theoretically, at least, - minimum wages reduce employment (or create unemployment) if the minimum wage floor is set above the competitive equilibrium wage. As for minimum wages reducing poverty, at least one researcher has determined that minimum wages in highly developed countries, like Canada, do not necessarily reduce the proportion of families in poverty rather they increase the proportion. If any of you are interested in my methodology and results, please come to my office and I'll be happy to discuss my working paper with you in detail. For now, let's focus on the low wage labour market and see how minimum wages can actually decrease employment (create unemployment)... w unemployment wmin S = MC w* LDM L* LSM D = MRP L So, in the simple diagram above, we can see that at the competitive equilibrium the wage rate is w* and the employment level is L*...the market clears. 71 Suppose the provincial government introduces minimum wage legislation and imposes a minimum wage of wmin. Now, in this low wage market all firms must pay their workers wmin > w*. This induces the firms to demand a lower quantity of labour (movement along the labour demand curve). Meanwhile, this policy induces workers to supply more of their labour into the market because of the higher wage (movement along the labour supply curve). As we can see in...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.

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