Answer to Question #107131 in Macroeconomics for jody

Question

with the aid of a diagram, discuss the welfare effect of this new legislation if the new minimum wage is (1) below the equilibrium wage and (2) above the equilibrium wage rate with labor hours as your quantity variable

Answer 1

1)Before the legislation: workers surplus =b+c;

employers surplus=a.

When the minimum wage is setted below the equilibrium suplliers(workers) surplas will be smaller as shown on the diagram(-b). The demand will exseed the supply.

2)Before the legislation: workers surplus = b+e;

employers surplus = a+c+d.

When the minimum wage is setted above the equilibrium suplliers(workers) surplas will be greater or smaller(+c but -e) and it depens on price elastisity. The supply will exseed the demand.