Multiple Choice
A firm's demand for labor is known as a derived demand because:
1
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15. Markets for the Factors of Production
Demand for Labor in Perfect Competition
Multiple Choice
How can minimum wages affect employment?
A
A minimum wage always reduces employment because firms cut hiring to afford higher wages.
B
Minimum wages affect wages but do not change employment levels in competitive markets.
C
A minimum wage always increases employment by boosting workers' incomes and demand for goods.
D
If set above the competitive equilibrium wage, a binding minimum wage reduces employment by creating excess labor supply; if set below equilibrium it has no effect.
Verified step by step guidance1
Understand the concept of a competitive labor market where the wage rate is determined by the intersection of labor supply and labor demand curves.
Identify the equilibrium wage, which is the wage rate where the quantity of labor supplied equals the quantity of labor demanded.
Recognize that a minimum wage is a legally imposed wage floor, meaning wages cannot legally go below this level.
Analyze the effect of a minimum wage set above the equilibrium wage: it creates a higher wage than the market-clearing level, leading to excess labor supply (unemployment) because more workers want to work at the higher wage but firms demand less labor.
Understand that if the minimum wage is set below the equilibrium wage, it is non-binding and has no effect on employment or wages because the market wage is already higher.
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