Answer to Question #87204 in Microeconomics for Nhlakanipho Mkhwanazi

Question

1.5 In the labour market for carpenters, the current market clearing wage rate is R800 per day. With the
aid of a diagram, discuss the welfare effects of government intervention in the form of legislation that
sets the minimum wage rate for a carpenter at R1000 per day. (20 marks)

Answer 1

If the minimum wage rate for a carpenter at R1000 per day is set, then there will be a surplus of labour, because the quantity of labour demanded will be higher than the quantity of labour supplied, so the market will become inefficient and the deadweight loss will be created. On the graph it will be depicted as the setting of the price floor of R1000 (the minimum wage rate level as a horizontal line) above the equilibrium point of R800.