Answer to Question #111381 in Microeconomics for Cleopatra

Question

with the aid of the graph discuss the welfare effect of the legislation on the new minimum wage is below the equilibrium wage and above the equilibrium wage rate with labour hours

Answer 1

It is normal for the market to have a situation where demand equals equilibrium, as shown in the diagram below.

Consider two types of government intervention in the labor market.

The first type is when the state sets the minimum wage below the equilibrium. This leads to a change in the function of labor supply, as shown in the following diagram.

As you can see, due to a decrease in equilibrium wages, the supply for this type of labor decreases.

The second type of market intervention is to set a minimum wage higher than that which is equilibrium in the market.

This type of market intervention leads to a decrease in supply, as shown in the diagram above.