The following diagram shows the market for labour in a particular industry. It shows both the supply of labour (the average cost of labout) and the marginal cost of labour.

a. Suppose the labour market is competitive. Indicate on the diagram the equilibrium wage and I employment (call them w* and L*).
b. Now suppose the government imposes a minimum wage equal to wmm > w*. Show what happens to wages and employment.
c. In the absence of a minimum wage, show the outcome if there is a monopsony buyer of labour services. Call this wage wp.
d. Beginning with the monopsony outcome, show what happens if the government imposes a minimum wage above u/but lower than w*.
e. Do minimum wages always reduce employment? Explain.

Transcribed Image Text:

MC S AC Al Employment