Answer to Question #111892 in Microeconomics for Mno

Question

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)minimum wage is above equilibrium. In that case the supply of labour force exceedes demad and quantity employed will decrease(Ld<L'). Such policy will effect welfare of consumers(employers) and suppliers(workers).

Cons.surplus:

before policy- a+b+c

after policy- a

Suppliers surplus:

before policy- d+e

after policy - b+d

So we can see decreace in wellbeing of employers and if b>e, the increase of welbeing of workers.

The market is not in equilibrium, so the economy loses (e+c).

That is for short-run, because in the long-run the market adjusts to new policy.

2)minimum wage is below equilibrium. In that case the demand of labour force exceedes the supply and quantity employed will decrease(Ls<L'). Such policy will effect welfare of consumers(employers) and suppliers(workers).

Consumers surplus:

before policy- a+d

after policy- a+b

Suppliers surplus:

before policy- b+c+e

after policy - c

So we can see decreace in wellbeing of workers and if b>d, the increase of welbeing of employers.

The market is not in equilibrium, so the economy loses (e+d).

That is for short-run, because in the long-run the market adjusts to new policy.