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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

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

To determine

In what cases the minimum wage could be binding and not binding?

Explanation

Minimum wage law is an example of price floor policy. Minimum wages are set by the government for the betterment of the labor in the society. If the minimum wages are set below the equilibrium wage rate in the market, as shown in the following diagram, then at minimum wage law, there is excess demand for labor. The firms will employ more of labor by offering higher wages, the wage starts rising. As wage starts rising, supply of labor rises. This process of rising wage rate will continue until the equilibrium point of ‘E’ is achieved. In this situation, the minimum wage law is not binding.

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