Answer to Question #111774 in Microeconomics for Allan Goba

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.