Answer to Question #189744 in Microeconomics for Siphosihle

Question

Use a diagram to explain the impact of the imposition of a minimum wage above the equilibrium wage in a perfectly competitive market

Answer 1

When the minimum wage is above the equilibrium level, then the laborers will be interested more in supplying labor and as the cost for the company is increasing, the firms will try to reduce their demand for laborers.

in the above diagram, the equilibrium level of wage and labor is W and L respectively. Due to the rise in the minimum wage rate, the labor demand falls and labor supply increases. Therefore, there will be an excess supply of labor, that is (Ls-Ld). This will raise the unemployment rate of the economy.