Determining the demand for labor by businesses

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Reference no: EM133231737

Assignment:

Suppose that Congress cares only for the welfare of the working poor and is considering raising the hourly minimum wage from $6 to $12. You have been called as an economic expert to study that market and testify about your findings. If necessary, assume that $12 is above the market equilibrium wage. You estimate the demand for labor by businesses to be QD = 100 - 2.5W. You also estimate the supply of labor by workers to be QS = 10W. W is the hourly wage rate, and both quantities are measured each week in thousands of hours.

The bill passes in the House and Senate and goes on for the President's signature. You realize only then that the estimates you gave to the Senate were based upon the short-run demand for labor. You go back to work, estimating the long-run demand for labor. You calculate that, without the raise in the minimum wage, labor demand in the long run will be the same as in the short-run. If the new minimum wage bill becomes law, though, the long-run demand for labor will be QD = 160 - 10W. The President calls you and asks you for your advice. She is confused as to why the long-run demand for labor is different from the short-run if the minimum wage rises. Why the difference?

A. More workers will enter the labor market in the long-run, driving up the equilibrium wage.

B. More workers will enter the labor market in the long-run, driving down the equilibrium wage.

C. The higher wage makes it more profitable to replace low-skill workers with machines, so low-skill labor demand decreases and becomes more responsive.

D. Labor demand is more inelastic in the long-run.

Reference no: EM133231737

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