A binding minimum wage established by the government
A) will be effective only if the minimum wage is set below the free- market equilibrium wage.
B) is a price floor that will create a surplus of workers if the labour market is competitive.
C) is essentially a price ceiling that creates a shortage of workers.
D) will affect adversely only those workers whose value of productivity is greater than this minimum wage.
E) will have no effect on the quantity of labour employed.

Question

Quizplus · Accepted Answer

A binding minimum wage established by the government is a price floor. If the minimum wage is set above the equilibrium wage in a competitive labor market, it will create a surplus of workers (unemployment). Therefore, choice B is the most accurate answer. Choices A, C, and D are incorrect because they suggest that a minimum wage below or equal to the equilibrium wage, a price ceiling, or affecting only workers with higher productivity would not lead to unintended consequences. Choice E is also incorrect because a minimum wage that is above the equilibrium wage will decrease the quantity of labor demanded by firms.

A Binding Minimum Wage Established by the Government