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2. Suppose the Australian government imposes a minimum wage

w_{\min }

that is...

Jun 10, 2024

Solution by Steps

step 1

To analyze the impact of a minimum wage

w_{\min}

that is higher than the competitive equilibrium wage, we first need to draw a supply and demand diagram for labor. The x-axis represents the quantity of labor (L), and the y-axis represents the wage rate (w)

step 2

In the competitive equilibrium, the supply and demand curves intersect at the equilibrium wage

w_e

and equilibrium quantity

L_e

step 3

When a minimum wage

w_{\min}

is imposed above the equilibrium wage

w_e

, it creates a price floor. This results in a higher wage rate but a lower quantity of labor employed

step 4

Label the areas on the diagram: - A: The area above the supply curve and below the minimum wage line up to the quantity of labor employed. - B: The area between the supply and demand curves from the equilibrium quantity to the quantity of labor employed. - C: The area above the demand curve and below the minimum wage line up to the quantity of labor employed. - D: The area between the supply and demand curves from the quantity of labor employed to the equilibrium quantity

step 5

The welfare analysis involves calculating the changes in consumer surplus (firms' surplus), producer surplus (workers' surplus), and the deadweight loss

step 6

Before the minimum wage: - Consumer surplus (firms' surplus) is the area below the demand curve and above the equilibrium wage, up to the equilibrium quantity:

CS = A + B + C

. - Producer surplus (workers' surplus) is the area above the supply curve and below the equilibrium wage, up to the equilibrium quantity:

PS = D + E

step 7

After the minimum wage: - Consumer surplus (firms' surplus) is reduced to the area below the demand curve and above the minimum wage, up to the quantity of labor employed:

CS' = A

. - Producer surplus (workers' surplus) is the area above the supply curve and below the minimum wage, up to the quantity of labor employed:

PS' = B + D

step 8

The deadweight loss is the loss of total surplus due to the reduction in the quantity of labor employed. It is represented by the areas

C

and

E

step 9

The net change in welfare for workers is the change in producer surplus:

\Delta PS = (B + D) - (D + E) = B - E

step 10

The net change in welfare for firms is the change in consumer surplus:

\Delta CS = A - (A + B + C) = - (B + C)

step 11

The net change in welfare for Australia as a whole is the sum of the changes in consumer and producer surplus, minus the deadweight loss:

\Delta W = \Delta CS + \Delta PS - (C + E) = - (B + C) + (B - E) - (C + E) = - (C + E)

step 12

Therefore, the imposition of a minimum wage

w_{\min}

results in a net welfare loss for Australia as a whole, represented by the areas

C

and

E

Answer

The imposition of a minimum wage

w_{\min}

results in a net welfare loss for Australia as a whole, represented by the areas

C

and

E

Key Concept

Minimum Wage and Welfare Analysis

Explanation

The imposition of a minimum wage above the competitive equilibrium wage creates a price floor, leading to a reduction in the quantity of labor employed, a decrease in consumer surplus (firms' surplus), an increase in producer surplus (workers' surplus), and a deadweight loss, resulting in a net welfare loss for the economy.