Answer to Question #109906 in Microeconomics for njabulo

Question

With the aid of a diagram, discuss the welfare effect of this new legislation if the new minimum wage is (1) below the equilibrium wage and (2) above the equilibrium wage rate with labour hours as your quantity variable

Answer 1

1)

If wages are lower than equilibrium, then the demand for labor is much higher than supply, since for low wages few workers will agree to perform the specified amount of work.

2)

If wages are higher than equilibrium, then the demand for labor is much less than supply, because with high wages, only a few entrepreneurs will be able to pay for this labor.