Question

From time to time, Congress has raised the minimum wage. Some people suggested that a government subsidy could help employers finance the higher wage. This exercise examines the economics of a minimum wage and wage subsidies. Suppose the supply of low-skilled labor is given by Upper L Superscript Upper S Baseline equals 10 w where LS is the quantity of low-skilled labor (in millions of persons employed each year), and w is the wage rate (in dollars per hour). The demand for labor is given by Upper L Superscript Upper D Baseline equals 90 minus 10 w . What will be the free-market wage rate and employment level? Suppose the government sets a minimum wage of $5.50 per hour. How many people would then be employed? (Enter all responses rounded to two decimal places. ) The equilibrium wage is $4.5 . The equilibrium employment level is 45 million people per year. With a minimum wage of $5.50 , there would be 35 million people employed. Suppose that instead of a minimum wage, the government pays a subsidy of $1.25 per hour for each employee. What will the total level of employment be now? What will the equilibrium wage rate be? (Enter all responses rounded to two decimal places. ) With a subsidy of $1.25 , the total level of employment is -------------million people per year, and the wage rate is $----------------

Answer 1

The computations are as follows

Step-by-step explanation:

The computation is shown below:

As we know that

In free market equilibrium

The labor supply = labor demand

Labor supply = Ls = 10w

Labor demand = Ld = 90 - 10w

so, the equation is

90 - 10w = 10w

20w = 90

w = 4.50

And,

L = 10 × 4.5 = 45

Now

When w = 5.5,

So,

Ld = 90 - (10 × 5.5)

= 90 - 55

= 35

This 35 represents the employment

Now if the new subsidy $1.25, the new labor demand function is

Ld = 90 - 10(w - 1.25)

= 90 - 10w + 12.5

= 102.5 - 10w

Now

Equate with Ls,

So,

102.5 - 10w = 10w

20w = 102.5

w = 5.13

And,

L = 10 × 5.125 = 51.25 million

This 51.25 million represents the employment