Suppose there is a semiskilled labor market and two different unskilled labor markets.Initially,all three markets are in competitive equilibrium.What would happen if the government imposed a minimum wage rate above the competitive equilibrium rate in one of the unskilled labor markets?
A)Wage rates will rise in all three markets.
B)Wage rates will rise in both unskilled labor markets,but remain unchanged in the semiskilled labor sector.
C)Wage rates will rise in the semiskilled labor market and in the unskilled labor market covered by the minimum wage,but fall in the other unskilled labor market.
D)Wage rates will rise in the unskilled labor market covered by the minimum wage,remain unchanged in the other unskilled labor market,and fall in the semiskilled labor market.
E)Wage rates will rise in the unskilled labor market covered by the minimum wage,but remain unchanged in the other two markets.

Question

Quizplus · Accepted Answer

When the minimum wage rate is imposed above the competitive equilibrium rate in one of the unskilled labor markets, the wage rate in that market will rise. However, this will cause employers in that market to substitute towards the other unskilled labor market where wages are lower. This increase in demand for labor in the other unskilled market will cause wage rates in that market to rise as well. At the same time, the increase in the cost of labor in the minimum wage market will cause employers to substitute towards semiskilled labor, increasing the demand for labor in that market and causing wage rates there to rise too. The wage rate in the unskilled labor market that is not affected by the minimum wage will fall due to the decrease in demand caused by the substitution effect. Therefore, the correct answer is C.

Suppose There Is a Semiskilled Labor Market and Two Different