Problem: Supply and Demand Review Application
Given the following equations that describe a labor market:
P=200-Qd
P=20+3Qs
Recall that in the context of the labor market, P =W (the market wage), Qd is the quantity demanded of labor and Qs is the quantity supplied of labor.
Also recall that in this context, firms are the consumers, since they are buying labor and workers are the producers, as they are supplying labor.
1. On the diagram below, sketch and label the supply and demand curves, and their intercepts.
2. Calculate the new equilibrium wage and quantity of labor and show them on the diagram.
3. What is the value of the consumer surplus when the market is in equilibrium?
4. What is the value of the producers surplus when the market is in equilibrium?
5. What is the sum of the consumer and producer surplus (i.e. the total surplus)? Is the equilibrium outcome considered to be efficient and why? Suppose the minimum wage is set at P=W=$185.
6. What is the quantity demanded of labor? Show this on the diagram.
7. What is the quantity supplied of labor? Show this on the diagram.
8. What is the magnitude of the excess supply of labor?
9. How much would workers require as a wage to provide the quantity of labor that you calculated in part (6) (This will be useful in calculating the new producer surplus.)
10. What is the value of the consumer surplus after the minimum wage has been set?
11. What is the value of the producers surplus after the minimum wage has been set?
12. What now is the sum of the consumer and producer surplus?
13. What is the deadweight loss to consumption? What is the deadweight loss to production? How much of the original total surplus is transferred from firms (consumers) to workers (producers)?
14. Describe the overall impact on consumers of the minimum wage. (Again, remember that in this case consumers are firms, who are buying labor.)
15. Describe the overall impact on producers of the minimum wage. (Again, remember that in this case producers are workers that are supplying labor.