Answer to Question #111546 in Microeconomics for Yogen Gengan

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

The walfare effect of this new legislation is to bring the minimum wage to the equilibrium labor and to maintain the equilibrium. If the new minimum wage is below the equilibrium wage the economy is in recession and when the new minimum wage is above the equilibrium the economy is in a progresion mode.