- Consider a simple demand-and-supply model of a competitive
labour market in a small town. The demand and supply curves for
labour are given by
where w is the wage ($ per hour) and L is the number of hours of
employment (measured in thousands of hours per month).
a. Plot the demand and supply curves to scale.
b. Solve for the equilibrium level of w and L in the case of
no government intervention.
c. Now suppose that the town council imposes a minimum
wage equal to $10 per hour. What is the new level of
employment?
d. Identify in your diagram the area that is the deadweight
loss. Compute its size, measured in thousands of dollars
per month.
Demand:w = 18 − 3 LD
Supply:w = 3 + 2 LS
