The Market for Semiskilled Labor Can Be Represented by the Following

question 93

Essay

The market for semiskilled labor can be represented by the following supply and demand curves:
L_D = 32000 - 4000W L_S = 8000 + 6000W,
where L = millions of person hours per year, and
W = the wage in dollars per hour.
a. Calculate the equilibrium price and quantity that would exist under a free market. What impact does a minimum wage of $3.35 per hour have on the market?
b. The government is contemplating an increase in the minimum wage to $5.00 per hour. Calculate the impact of the new minimum wage on the quantity of labor supplied and demanded.
c. Calculate producer surplus (laborers' surplus) before and after the proposed change. Comment on the net effect of the proposed change upon workers as a whole and on individual workers. How does this price floor differ from an agricultural support price?
d. Is the policy efficient from an economist's viewpoint?

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Definitions:

Capital Asset Pricing Model

A model that describes the relationship between systematic risk and expected return for assets, particularly stocks, used in finance to price risky securities.

William Sharpe

An economist who created the Sharpe Ratio, a measure to calculate risk-adjusted return.

SML (Security Market Line)

A line in the Capital Asset Pricing Model that shows the relationship between the expected return of a security and its risk.

Risk Averse

A tendency to prefer certainty over uncertain outcomes to minimize exposure to financial loss.