Answer to Question #88575 in Microeconomics for Nozipho Nzama

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.