Consider the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour. As a result of the imposition of the minimum wage, total economic surplus falls by ______ per day

Question

Consider the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour.  As a result of the imposition of the minimum wage, total economic surplus falls by ______ per day

Quizplus · Accepted Answer

The shaded area in the graph represents the total economic surplus before the imposition of the minimum wage. After the minimum wage is imposed, the wage rate increases to $8.00 per hour, which reduces the quantity of labor demanded from 800 to 500 hours per day. At the same time, the quantity of labor supplied increases from 400 to 700 hours per day. This creates a surplus of labor (unemployment) of 200 hours per day (700-500), which is shown as the vertical distance between the supply and demand curves at the wage rate of $8.00 per hour.

The area of the triangle ABC represents the total economic surplus after the imposition of the minimum wage. The base of the triangle is 500-200=300 hours, and the height is $12.00-$8.00=$4.00 per hour. Therefore, the area of the triangle is 1/2 x 300 hours x $4.00 per hour = $600 per day.

The area of the shaded rectangle ADEF represents the loss in economic surplus due to the imposition of the minimum wage. The width of the rectangle is 200 hours, and the height is $4.00 per hour. Therefore, the area of the rectangle is 200 hours x $4.00 per hour = $800 per day.

Since the loss in economic surplus is equal to the area of the shaded rectangle, the answer is (C) $12,000 per day ($800 per day x 15 days per month x 10 months per year).

Consider the Labor Market Below