begin slides by eric chiang and kevin brady price floors / minimum wage interactive examples...

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Slides By

Eric Chiang and Kevin Brady

Price Floors / Minimum Wage

Interactive Examples

CoreEconomics, 2e

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Material from this presentation can be found in:

Chapter 3

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At Clown Kingdom there is a labor market for clowns as shown in the diagram to the right. Wages for clowns are measured on the vertical axis, and the number of clowns is measured on the horizontal axis.

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Supply

Demand



Answer

QUESTION ONE:

In this market, what is the equilibrium wage for clowns and the equilibrium number of clowns hired?

Hint

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Supply

Demand



Hint:

The equilibrium wage and clowns hired occurs at the wage and quantity where the demand and supply curves intersect.



Next

QUESTION ONE:

In this market, what is the equilibrium wage for clowns and the equilibrium number of clowns hired?

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Supply

Demand

Answer: $20 and 40 clowns



Answer

Suppose the Clown Union negotiates a minimum wage of $25 for all clowns working at Clown Kingdom. How will the quantity demanded and quantity supplied of clowns change? What is the new quantity demanded and quantity supplied of clowns at Clown Kingdom?

Hint

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Supply

Demand

QUESTION TWO:



Hint:

First, determine whether the minimum wage is binding, which occurs if the minimum wage is higher than the equilibrium wage. If so, then the new quantity demanded and quantity supplied will occur where the horizontal line representing the minimum wage intersects the demand and supply curves, respectively.



QUESTION TWO:

Next

Suppose the Clown Union negotiates a minimum wage of $25 for all clowns working at Clown Kingdom. How will the quantity demanded and quantity supplied of clowns change? What is the new quantity demanded and quantity supplied of clowns at Clown Kingdom?

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Supply

Demand

Min Wage

Answer: At a higher wage of $25, the quantity of clowns supplied increases from 40 to 50, while the quantity of clowns demanded decreases from 40 to 30.

QUESTION TWO:

Qty supplied

Qty demanded



Answer

At the minimum wage of $25, how many clowns will be hired? Is there a shortage or surplus (or neither) of clowns? Calculate this shortage or surplus, if any.

Hint

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Supply

Demand

Min Wage

QUESTION THREE:



Hint:


QUESTION THREE:

Hint:

A shortage occurs if the quantity demanded exceeds quantity supplied at the minimum wage, while a surplus occurs if quantity supplied exceeds quantity demanded at the minimum wage. If the minimum wage is below the equilibrium wage, then the minimum wage is non-binding. If the minimum wage is above the equilibrium wage, the number of clowns hired will equal the number demanded at the minimum wage.



Next

At the minimum wage of $25, how many clowns will be hired? Is there a shortage or surplus (or neither) of clowns? Calculate this shortage or surplus, if any.

Answer: At $25, 30 clowns will be demanded. A surplus of 20 clowns will occur as the minimum wage is above the equilibrium wage. This surplus of 20 clowns represents unemployment at Clown Kingdom.

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Supply

Demand

Min Wage

QS > QD

Surplus = 50 – 30 = 20

QUESTION THREE:



Answer

At the minimum wage of $25, calculate the value of the deadweight loss (unexploited gains from trade) created by this higher wage.

Hint

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Supply

Demand

Min Wage

QUESTION FOUR:



Hint:


Hint:

The deadweight loss is the triangle area below the demand curve, above the supply curve, and between the equilibrium wage and the quantity demanded at the minimum wage. The formula for the area of a triangle is ½ x base x height.



QUESTION FOUR:

Next

At the minimum wage of $25, calculate the value of the deadweight loss (unexploited gains from trade) created by this higher wage.

At a minimum wage of $25, only 30 clowns will be hired. A deadweight loss occurs because there are 10 clowns that would be willing to work for less than $25 but cannot find work because of the minimum wage, creating unexploited gains from trade (or deadweight loss). The value of this deadweight loss is: ½ x (40 – 30) x ($25 – $15) = $50 (for every hour that these 10 un-hired clowns would have worked if the minimum wage was not in effect).

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Supply

Demand

Min Wage

Deadweight Loss = ½ x (40 – 30) x ($25 – $15) = $50

QUESTION FOUR:



Answer

Suppose that due to a freak accident where 20 clowns attempted to pack into a compact car, got stuck and subsequently suffocated, thus drastically reducing the supply of clowns by 20 at every wage. Shift the supply curve accordingly. How does this shift impact the equilibrium wage and number of clowns in this market? What happens to the impact of the minimum wage?

Hint

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Supply

Demand

Min Wage

QUESTION FIVE:



Hint:


Hint:

Shift the supply curve so that at every wage, there are 20 fewer clowns being supplied. Determine the new equilibrium wage and quantity of clowns by the intersection of the new supply curve and the existing demand curve. Determine whether the minimum wage is above, equal, or below the new equilibrium wage. If the minimum wage is equal to or below the equilibrium, it would no longer be binding.



Suppose that due to a freak accident where 20 clowns attempted to pack into a compact car, got stuck and subsequently suffocated, thus drastically reducing the supply of clowns by 20 at every wage. Shift the supply curve accordingly. How does this shift impact the equilibrium wage and number of clowns in this market? What happens to the impact of the minimum wage?

Wage

$15

$20

$25

$30

60 Numberof Clowns

50403020

Old

Demand

Min Wage

ANSWER:If 20 clowns are removed from the supply curve at every wage, the supply curve would shift left by exactly 20 clowns. The new equilibrium wage would be $25 and the new equilibrium number of clowns would be 30. At this new equilibrium, the minimum wage of $25 is no longer binding, since the equilibrium wage of $25 equals the minimum wage. Thus, the market equilibrium will prevail.

New Supply Supply

QUESTION FIVE:

Min wage no longer binding

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