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Unformatted text preview: In-Class Practice Problems for Chapter 9:Micro IISpring 20101. In 1996, the U.S. Congress raised the minimum wage in the U.S. 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. Suppose the supply of low-skilled labor is given by:Ls= 10wWhere Lsis the quantity of low-skilled labor (in millions of persons employed each year), and wis the wage rate (in dollars per hour). The demand for labor is given by:Ld= 80 10wa. What will the free-market wage rate and employment level be? Suppose the government sets a minimum wage of $5 per hour. How many people would then be employed? How many people would like to be employed at w=$5? What is the change in workers surplus and net welfare due to the minimum wage?In a free-market equilibrium, LS= LD. Solving yields w = $4 and LS = LD = 40. If the minimum wage is $5, then LS = 50 and LD = 30. The number of people employed will be given by the labor demand, so employers will hire 30 million workers. be given by the labor demand, so employers will hire 30 million workers....
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This note was uploaded on 04/19/2011 for the course ECON 101 taught by Professor Gul during the Spring '11 term at Lahore School of Economics.
- Spring '11