_YARA_ECON201

Sample Solution

Full Answer Section

• Graphical Illustration:

  • Imagine the supply curve (S) upward-sloping, representing workers' increasing willingness to work as wages rise.
  • The demand curve (D) is downward-sloping, reflecting firms' diminishing need for labor as wages increase.
  • The equilibrium wage (We) and quantity of labor demanded (Le) are determined by the intersection of S and D.
  • A minimum wage (Wm) set above We shifts the effective minimum wage line (horizontal line at Wm) upward.
  • Firms reduce their labor demand to Ln, leading to unemployment (shaded area) of Le - Ln.

b. Maximum Wage Below Equilibrium:

• Increased Employment: When a maximum wage is set below the equilibrium wage, the quantity of labor demanded by firms initially increases. This is because:

  • Firms face lower labor costs due to the mandated maximum, making it cheaper to hire additional workers.
  • However, this incentivizes firms to exploit workers through longer hours, unsafe conditions, or lower quality.
  • The labor market becomes less competitive, potentially harming workers' bargaining power and long-term well-being.

• Graphical Illustration:

  • Imagine the same supply and demand curves as in (a).
  • A maximum wage (Wm) set below We shifts the effective maximum wage line (horizontal line at Wm) downward.
  • Firms increase their labor demand to Ln, leading to apparent overemployment (shaded area) of Ln - Le.

• Caution: This apparent overemployment might not be sustainable in the long run due to potential negative consequences for worker well-being, productivity, and firm profitability.

Key Considerations:

• These analyses are based on simplified assumptions and may not perfectly reflect real-world complexities.
• The specific impacts of minimum and maximum wages can vary depending on factors like the elasticity of supply and demand, the presence of alternative employment opportunities, and government enforcement mechanisms.
• It's crucial to weigh the potential benefits and drawbacks of these policies carefully, considering their economic, social, and political implications.

I hope this comprehensive explanation, incorporating the strengths of both Response A and Response B while addressing their potential shortcomings, proves helpful!