ec-16 - HOMEWORK#6 ANSWERS E201 Spring 2009 Please write...

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HOMEWORK #6 ANSWERS E201 Spring 2009 Please write out answers to the following on separate paper and hand them in at your CL session this week. Reminder: you are welcome to work with a study buddy, but the answers you hand in must be your own work. Copying answers is not permitted. If answers appear to be copied, I am obligated to file an academic misconduct report and impose a penalty. 1. a. A case study in chapter 6 discusses the federal minimum wage law. Assume the minimum wage is set above the equilibrium wage in the market for unskilled labor. Using a supply-and-demand diagram of the market for low-wage (unskilled) labor, show the actual wage paid, the number of workers who are employed, and the number of workers who are unemployed. Also show the total wage payments to unskilled workers. b. Now suppose the Secretary of Labor proposes an increase in the minimum wage. What effect would this increase have on employment? Does the size of the change depend on the elasticity of demand, elasticity of supply, both elasticities, or neither? c. What effect would this increase in the minimum wage have on unemployment? Does the size of the change in unemployment depend on the elasticity of demand, the elasticity of supply, both elasticities, or neither? d. If the demand for unskilled labor were inelastic, would the proposed increase in the minimum wage raise or lower total wage payments to unskilled workers? Would your answer change if the demand for unskilled labor were elastic? Wage S L min. wage D L Labor E UE E = Employed, UE = Unemployed The shaded area is total wage payments = Wage x (Quantity Employed) b. The effect would be to decrease employment. The more elastic the demand curve is, the greater will be the decline in employment. c. The increase in the minimum wage will increase unemployment. Both supply and demand elasticities affect unemployment: the more elastic both curves are, the
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larger the increase in unemployment. d.
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ec-16 - HOMEWORK#6 ANSWERS E201 Spring 2009 Please write...

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