Answer to Question #88481 in Microeconomics for Litha Jejane

Question #88481
A minimum wage in a perfectly competitive labour market

a) will normally be imposed below the equilibrium wage.
b) which is imposed above the equilibrium wage, will lead to excess demand of labour.
c) which is set above equilibrium wage, will lead to unemployment.
d) can be instituted in an attempt to exploit low-wage workers and depress their living standards even further.
Expert's answer

c) which is set above equilibrium wage, will lead to unemployment.

In a perfectly competitive labour market, the wage rate is usually determined by the interaction between labour demand and labour supply in the industry. Firms in the industry are just wage takers since there is an equilibrium wage rate in the industry. Thus, when a minimum wage is set above the equilibrium wage, disequilibrium will occur in the market. The disequilibrium occurs because the demand for labor in the industry will decline and supply for labor will increase as many people will want to participate in the industry. Firms will hire few people at a higher wage rate and some will remain unemployed. Therefore, setting a minimum wage above the equilibrium wage will create involuntary employment in the market.

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