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Chapter 4: Q23 (page 105)

Under what circumstances would a minimum wage be a nonbinding price floor? Under what circumstances would a living wage be a binding price floor?

Short Answer

Expert verified

Wage floor is non binding, when set below equilibrium wage rate. Living wage is binding, when set above equilibrium wage rate.

Step by step solution

01

Basic Concept 

Price Floor is the minimum mandated price sale price of a good or service, imposed by regulatory body to protect the interests of sellers.

In case of labor markets : price of productive services paid by firms (buyers) & received by workers (sellers) - are wages or salaries.

So, minimum wage is a form of price floor.

02

Detail Explanation 

Price (Wage) Floor is non binding if it is set below the equilibrium price, as it has no protective effect on sellers, since the equilibrium price would anyways have been above the fixed price.

Price Floor (Living Wage) is binding if it is set above the equilibrium price, as it has protective effect on sellers, since the fixed price is more than free market equilibrium price.

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Most popular questions from this chapter

Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In your opinion, would this be a good policy?

If the government imposed a federal interest rate ceiling of 20% on all loans, who would gain and who would lose?

Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In

your opinion, would this be a good policy?

Imagine that to preserve the traditional way of life in small fishing villages, a government decides to impose a price floor that will guarantee all fishermen a certain price for their catch.

a. Using the demand and supply framework, predict the effects on the price, quantity demanded, and quantity supplied.

b. With the enactment of this price floor for fish, what are some of the likely unintended consequences in the market?

c. Suggest some policies other than the price floor to make it possible for small fishing villages to continue.

Whether the product market or the labor market, what happens to the equilibrium price and quantity for each of the four possibilities: increase in demand, decrease in demand, increase in supply, and decrease in

supply.
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