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The government sets a minimum wage above the current equilibrium wage

Economics Dec 14, 2020

The government sets a minimum wage above the current equilibrium wage.

a. What effect does the minimum wage have on the market equilibrium?

b. What are its effects on consumer surplus, producer surplus, and total surplus?

c. Who are the customers and who are the producers?

Expert Solution

a) As the input prices are an image of supply and wages are basically the price of labour input to production, so if the minnimum wage will increase, the supply curve will be shifted up relevent to the amount of wages increased and hence the market equilibrium will increase.

b) Before the introduction of minimum wage, the entire surplus was above supply curve and below demand curve. After the increase of minimum wage, there will be loss of surplus known as deadweight loss.

c) After the introduction of minimum wages, consumers lost surplus in some areas but gained surplus in others while the producers have lost the surplus.

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