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Interactive Examples Price Floors / Minimum Wage Begin To navigate, please click the appropriate green buttons. (Do not use the arrows on your keyboard) Material from this presentation can be found in: Chapter 3 Slides By Eric Chiang and Kevin Brady CoreEconomics, 2e Interactive Examples Price Floors / Minimum Wage Next At Clown Kingdom there is a labor market for clowns as shown in the diagram to the right. Wages for clowns are measured on the vertical axis, and the number of clowns is measured on the horizontal axis. Wage Supply $30 $25 $20 $15 Demand 20 30 40 50 60 Number of Clowns Interactive Examples Price Floors / Minimum Wage Wage QUESTION ONE: In this market, what is the equilibrium wage for clowns and the equilibrium number of clowns hired? Supply $30 $25 $20 $15 Demand 20 Hint 30 40 50 60 Number of Clowns Answer Interactive Examples Price Floors / Minimum Wage Hint: The equilibrium wage and clowns hired occurs at the wage and quantity where the demand and supply curves intersect. Interactive Examples Price Floors / Minimum Wage Next Wage QUESTION ONE: In this market, what is the equilibrium wage for clowns and the equilibrium number of clowns hired? Answer: $20 and 40 clowns Supply $30 $25 $20 $15 Demand 20 30 40 50 60 Number of Clowns Interactive Examples Price Floors / Minimum Wage Wage Supply QUESTION TWO: Suppose the Clown Union negotiates a minimum wage of $25 for all clowns working at Clown Kingdom. How will the quantity demanded and quantity supplied of clowns change? What is the new quantity demanded and quantity supplied of clowns at Clown Kingdom? $30 $25 $20 $15 Demand 20 Hint 30 40 50 60 Number of Clowns Answer Interactive Examples Price Floors / Minimum Wage QUESTION TWO: Hint: First, determine whether the minimum wage is binding, which occurs if the minimum wage is higher than the equilibrium wage. If so, then the new quantity demanded and quantity supplied will occur where the horizontal line representing the minimum wage intersects the demand and supply curves, respectively. Interactive Examples Price Floors / Minimum Wage Next Wage Supply QUESTION TWO: Suppose the Clown Union negotiates a minimum wage of $25 for all clowns working at Clown Kingdom. How will the quantity demanded and quantity supplied of clowns change? What is the new quantity demanded and quantity supplied of clowns at Clown Kingdom? Answer: At a higher wage of $25, the quantity of clowns supplied increases from 40 to 50, while the quantity of clowns demanded decreases from 40 to 30. $30 Min Wage $25 $20 $15 Qty supplied Qty demanded 20 Demand 30 40 50 60 Number of Clowns Interactive Examples Price Floors / Minimum Wage Wage QUESTION THREE: At the minimum wage of $25, how many clowns will be hired? Is there a shortage or surplus (or neither) of clowns? Calculate this shortage or surplus, if any. Supply $30 Min Wage $25 $20 $15 Demand 20 Hint 30 40 50 60 Number of Clowns Answer Interactive Examples Price Floors / Minimum Wage QUESTION THREE: Hint: Hint: First, determine whether the minimum wage is binding, A shortage occurs if the quantity demanded exceeds which occurs if the minimum wage is higher than the quantity supplied at the minimum wage, while a surplus equilibrium wage. If so, then the new quantity occurs if quantity supplied exceeds quantity demanded at demanded and quantity supplied will occur where the the minimum wage. If the minimum wage is below the horizontal line representing the minimum wage equilibrium wage, then the minimum wage is non-binding. If intersects the demand and supply curves, respectively. the minimum wage is above the equilibrium wage, the number of clowns hired will equal the number demanded at the minimum wage. Interactive Examples Price Floors / Minimum Wage Next Wage QUESTION THREE: At the minimum wage of $25, how many clowns will be hired? Is there a shortage or surplus (or neither) of clowns? Calculate this shortage or surplus, if any. Answer: At $25, 30 clowns will be demanded. A surplus of 20 clowns will occur as the minimum wage is above the equilibrium wage. This surplus of 20 clowns represents unemployment at Clown Kingdom. Supply $30 QS > QD $25 Min Wage $20 $15 Demand Surplus = 50 – 30 = 20 20 30 40 50 60 Number of Clowns Interactive Examples Price Floors / Minimum Wage QUESTION FOUR: At the minimum wage of $25, calculate the value of the deadweight loss (unexploited gains from trade) created by this higher wage. Wage Supply $30 Min Wage $25 $20 $15 Demand 20 Hint 30 40 50 60 Number of Clowns Answer Interactive Examples Price Floors / Minimum Wage QUESTION FOUR: Hint: Hint: First, determine whether the minimum wage is binding, The deadweight loss is the triangle area below the demand which occurs if the minimum wage is higher than the curve, above the supply curve, and between the equilibrium equilibrium wage. If so, then the new quantity wage and the quantity demanded at the minimum wage. demanded and quantity supplied will occur where the The formula for the area of a triangle is ½ x base x height. horizontal line representing the minimum wage intersects the demand and supply curves, respectively. Interactive Examples Price Floors / Minimum Wage Next QUESTION FOUR: At the minimum wage of $25, calculate the value of the deadweight loss (unexploited gains from trade) created by this higher wage. Wage Supply Deadweight Loss = $30 ½ x (40 – 30) x ($25 – $15) = $50 Min Wage $25 At a minimum wage of $25, only 30 clowns will be hired. A deadweight loss occurs because there are 10 clowns that would be willing to work for less than $25 but cannot find work because of the minimum wage, creating unexploited gains from trade (or deadweight loss). The value of this deadweight loss is: ½ x (40 – 30) x ($25 – $15) = $50 (for every hour that these 10 un-hired clowns would have worked if the minimum wage was not in effect). $20 $15 Demand 20 30 40 50 60 Number of Clowns Interactive Examples Price Floors / Minimum Wage QUESTION FIVE: Suppose that due to a freak accident where 20 clowns attempted to pack into a compact car, got stuck and subsequently suffocated, thus drastically reducing the supply of clowns by 20 at every wage. Shift the supply curve accordingly. How does this shift impact the equilibrium wage and number of clowns in this market? What happens to the impact of the minimum wage? Wage Supply $30 Min Wage $25 $20 $15 Demand 20 Hint 30 40 50 60 Number of Clowns Answer Interactive Examples Price Floors / Minimum Wage Hint: Hint: First, determine whether the minimum wage is binding, Shift the supply curve so that at every wage, there are 20 which occurs if the minimum wage is higher than the fewer clowns being supplied. Determine the new equilibrium wage. If so, then the new quantity equilibrium wage and quantity of clowns by the intersection demanded and quantity supplied will occur where the of the new supply curve and the existing demand curve. horizontal line representing the minimum wage Determine whether the minimum wage is above, equal, or intersects the demand and supply curves, respectively. below the new equilibrium wage. If the minimum wage is equal to or below the equilibrium, it would no longer be binding. Interactive Examples Price Floors / Minimum Wage QUESTION FIVE: Suppose that due to a freak accident where 20 clowns attempted to pack into a compact car, got stuck and subsequently suffocated, thus drastically reducing the supply of clowns by 20 at every wage. Shift the supply curve accordingly. How does this shift impact the equilibrium wage and number of clowns in this market? What happens to the impact of the minimum wage? ANSWER: If 20 clowns are removed from the supply curve at every wage, the supply curve would shift left by exactly 20 clowns. The new equilibrium wage would be $25 and the new equilibrium number of clowns would be 30. At this new equilibrium, the minimum wage of $25 is no longer binding, since the equilibrium wage of $25 equals the minimum wage. Thus, the market equilibrium will prevail. New Supply Wage Old Supply $30 Min Wage $25 $20 Min wage no longer binding $15 Demand 20 30 40 50 60 Number of Clowns Start Over