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Chapter 5: Problem 12

Many college students attempt to land internships before graduation to burnish their resumes, gain experience in a chosen field, or try out possible careers. The hope shared by all of these prospective interns is that they will find internships that pay more than typical summer jobs, such as waiting tables or flipping burgers. a. With wage measured on the vertical axis and number of hours of work on the horizontal axis, draw a supply and demand diagram for the market for interns in which the minimum wage is non-binding at the market equilibrium. b. Assume that a market downturn reduces the demand for interns by employers. However, many students are willing and eager to work in unpaid internships. As a result, the new market equilibrium wage is equal to zero. Draw another supply and demand diagram to illustrate this new market equilibrium. As in Figure 5 -7, include a shaded triangle that represents the deadweight loss from the minimum wage. Using the diagram, explain your findings.

Short Answer

Expert verified
Answer: The deadweight loss occurs because some students who are willing to work for a lower wage (below the minimum wage) cannot find internships because employers are not willing to pay the higher wage required by the minimum wage law. It is represented by the area of the triangle formed by the supply and demand curves and the minimum wage line.

Step by step solution

01

Set up the graph

Draw two axes, with the vertical axis representing the wage and the horizontal axis representing the number of hours of work. Label the axes accordingly.
02

Draw the demand and supply curves

Draw a downward-sloping demand curve representing employer demand for interns. Draw an upward-sloping supply curve representing student willingness to work internships.
03

Identify the market equilibrium

Find the point where the demand and supply curves intersect. This point represents the market equilibrium, market wage W* and equilibrium hours of work Q*.
04

Add a non-binding minimum wage

Illustrate a minimum wage (Wmin) below the market equilibrium wage (W*). The non-binding minimum wage means that it does not impact the market outcome, so the market stays at equilibrium W* and Q*. #b. Draw the supply-demand diagram with the new market equilibrium where the wage is zero, and identify the deadweight loss.#
05

Draw the initial supply-demand diagram

Begin by drawing the initial supply-demand diagram as described in part (a), with the wage on the vertical axis and hours of work on the horizontal axis.
06

Illustrate the market downturn

Show the decrease in demand for interns by drawing a new, lower demand curve.
07

Identify the new market equilibrium

Find the point where the new demand curve intersects the supply curve. This represents the new market equilibrium, where the wage equals zero (unpaid internships).
08

Add the minimum wage

Indicate the original minimum wage (Wmin) on the graph. Since the new market equilibrium wage is zero, which is below the minimum wage, the minimum wage becomes binding.
09

Identify the deadweight loss

The deadweight loss is the area of the triangle formed by the supply and demand curves and the minimum wage line. Shade this triangle to represent the deadweight loss due to the minimum wage. Using the diagram, explain that the deadweight loss occurs because some students who are willing to work for a lower wage (below the minimum wage) cannot find internships because employers are not willing to pay the higher wage required by the minimum wage law.

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Most popular questions from this chapter

In many European countries high minimum wages have led to high levels of unemployment and underemployment, and a two-tier labor system. In the formal labor market, workers have good jobs that pay at least the minimum wage. In the informal, or black market for labor, workers have poor jobs and receive less than the minimum wage. a. Draw a demand and supply diagram showing the effect of the imposition of a minimum wage on the overall market for labor, with wage on the vertical axis and hours of labor on the horizontal axis. Your supply curve should represent the hours of labor offered by workers according to the wage, and the demand curve represents the hours of labor demanded by employers according to the wage. On your diagram show the deadweight loss from the imposition of a minimum wage. What type of shortage is created? Illustrate on your diagram the size of the shortage. b. Assume that the imposition of the high minimum wage causes a contraction in the economy so that employers in the formal sector cut their production and their demand for workers. Illustrate the effect of this on the overall market for labor. What happens to the size of the deadweight loss? The shortage? Illustrate with a diagram. c. Assume that the workers who cannot get a job paying at least the minimum wage move into the informal labor market where there is no minimum wage. What happens to the size of the informal market for labor as a result of the economic contraction? What happens to the equilibrium wage in the informal labor market? Illustrate with a supply and demand diagram for the informal market. Solution a. The shortage created is a shortage of jobs: at the minimum wage there are more job-seekers than there are jobs available. b. The contraction in the economy causes the demand for labor to fall, shifting the demand curve leftwards from \(\mathrm{D}\) to its new position at \(\mathrm{D}^{\prime}\). Both the deadweight loss and the shortage of jobs caused by the minimum wage increase as a result of the fall in the demand for labor. c. As a result of the economic contraction which reduces the demand for workers in the overall market, workers move to the informal labor market. This increases the supply of labor in the informal labor market. The supply curve for labor shifts rightwards from \(S\) to its new position at \(S^{\prime}\). The equilibrium wage in the informal labor market falls from \(w^{*}\) to \(w^{* *}\) and the quantity of hours transacted increases from \(Q^{*}\) to \(Q^{* *}\), as the informal labor market expands.Solution a. The shortage created is a shortage of jobs: at the minimum wage there are more job-seekers than there are jobs available. b. The contraction in the economy causes the demand for labor to fall, shifting the demand curve leftwards from \(\mathrm{D}\) to its new position at \(\mathrm{D}\) '. Both the deadweight loss and the shortage of jobs caused by the minimum wage increase as a result of the fall in the demand for labor. c. As a result of the economic contraction which reduces the demand for workers in the overall market, workers move to the informal labor market. This increases the supply of labor in the informal labor market. The supply curve for labor shifts rightwards from \(S\) to its new position at \(S^{\prime}\). The equilibrium wage in the informal labor market falls from \(w^{*}\) to \(w^{* *}\) and the quantity of hours transacted increases from \(Q^{*}\) to \(Q^{* *}\), as the informal labor market expands.

In the late eighteenth century, the price of bread in New York City was controlled, set at a predetermined price above the market price. a. Draw a diagram showing the effect of the policy. Did the policy act as a price ceiling or a price floor? b. What kinds of inefficiencies were likely to have arisen when the controlled price of bread was above the market price? Explain in detail. One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market price. New York bakers found that the controlled price of bread in New York was below the market price. c. Draw a diagram showing the effect of the price control on the market for bread during this one-year period. Did the policy act as a price ceiling or a price floor? d. What kinds of inefficiencies do you think occurred during this period? Explain in detail.
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