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chapter7questions - EFFICIENCY AND EXCHANGE 1. Consider a...

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EFFICIENCY AND EXCHANGE 1. Consider a labor market in which all firms are identical, and, the equilibrium level of employment is E and the equilibrium wage is w. Thus, the total earnings for all workers is simply w*E . Suppose that the demand for labor in this market is represented by straight-line (linear) demand curve. At the equilibrium wage, the elasticity of demand is greater than 1. Suppose a minimum wage, w m , is imposed by the government and that w m >w. a. What will happen to total earnings, w*E? b. Under what conditions will the imposition of a minimum wage increase total earnings and under what conditions will it decrease total earnings (assuming that w m >w)? c. Given your answer to part a., make an argument either for or against the effectiveness of a minimum wage at alleviating poverty in the market described above. a. Total earnings will go down. Given that the demand for labor can be represented by a straight line, we know that if the elasticity of demand equals 1 at the equilibrium wage, then it must be greater than one above the equilibrium wage. That is, at any wage level above the equilibrium wage, the demand for labor will be elastic. Thus, as the wage rate goes up, total earnings will fall. a. When the demand for labor is inelastic. b. Increases in the minimum wage may not always lead total earnings to increase. That is, even though wage rates may increase, employment could decrease, and total earnings could fall. 2.
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This note was uploaded on 08/02/2011 for the course ECON 1 taught by Professor Tang during the Spring '08 term at UCSD.

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chapter7questions - EFFICIENCY AND EXCHANGE 1. Consider a...

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