The diagram below shows supply and demand in the I labour market.

a. At the free-market equilibrium, w* and L*, show what areas represent consumer and producer surplus.
b. Now suppose the government establishes a minimum wage at wM. Show on the diagram and label the new level of employment in this case.
c. In the situation of part (b), what areas now represent consumer and producer surplus? Is the outcome allocatively efficient? Explain.

Transcribed Image Text:

Supply of labour tu Demand for lah Employment