Answer to Question #304081 in Microeconomics for Ankit

Question

In the labour market, workers would like to receive higher wages and firms would like to pay lower

wages.

a. Suppose that workers succeed in having a minimum wage established above the equilibrium

wage. What will happen to the number of workers employed when compared to the original

equilibrium?

b. Suppose that firms succeed in having a maximum wage established below the equilibrium wage.

What will happen to the number of workers employed compared to the original equilibrium?

c. What wage maximizes the number of workers employed? Why?

Answer 1

A) When the prices of labour are set higher than the equilibrium price, the amount of labour supplied will increase while the firms demand for labour will decline thus we end up with a surplus of labour.

B) When the prices of labour are set lower than the equilibrium, few labourers will be willing to supply their labour at the new price while the firms will be willing to employ more labour at the new price thus we end up with deficit of labour.

C) Equilibrium price optimizes the number of workers employed since at this price both the workers and the employers are willing to supply and employ equal amount of labour respectively.