The elasticity of demand for employees is -0.50.It is also estimated that the existing minimum wage (price floor)has increased the raise the wage by 25% above equilibrium wage.How much would the employment change if the price floor was eliminated?
A) Employment would decrease by 12.5%.
B) Employment would increase by 12.5%.
C) Employment would decrease by 25%.
D) Employment would increase by 25%.

Question

Quizplus · Accepted Answer

The elasticity of demand for employees is -0.50, which means that a 1% increase in the wage rate will lead to a 0.50% decrease in employment. The existing minimum wage has increased the wage rate by 25% above the equilibrium wage. Thus, employment would have decreased by 12.5%. If the price floor were eliminated, the market wage rate would revert to the equilibrium wage rate. As a result, the wage rate would decrease by 25%, which would lead to an increase in employment. The inverse of the 0.50 elasticity of demand for employees implies that a 1% decrease in the wage rate would lead to a 2% increase in employment (1/0.50=2). Therefore, a 25% decrease would increase employment by 50%. However, since the minimum wage elimination would only decrease the wage rate by 25%, the increase in employment would be half of 50%, which equals 25%. Therefore, employment would increase by 12.5% (25% x 0.50).

The Elasticity of Demand for Employees Is -0