# From the perspective of economic theory, what is a minimum wage and when is it binding?

1.From the perspective of economic theory, what is a minimum wage and when is it binding?

2.According to the Fair Work Commission’s National Minimum Wage Order for 2018 (available on it’s website), what is the national minimum wage per hour in Australia for an adult worker?

The following information will be used for the remaining 10 questions. Assume that the market for unskilled labour in Australia is a competitive market and can be described by the following demand and supply curves: D = 1,500,000 – 60,000W S = 120,000W – 1,200,000 Where W = wage rate per hour for labour, D is hours of labour demanded and S is hours of labour supplied.

3.Calculate the equilibrium wage rate and quantity of unskilled labour employed. Draw a diagram to illustrate your answer.

4.Show on your diagram and calculate the size of the: (i) Consumer/firm surplus

(ii) Producer/worker surplus

(iii) Total Surplus

5.Suppose that the Fair Work Commission imposes a minimum wage of \$19 per hour.

(i) How many hours of employment are exchanged in the market?

(ii) Calculate the size of the surplus or shortage of hours created by the imposition of the minimum wage.

6.Assume that a minimum wage of \$19.00 per hour is introduced. However, there is no change in either the Supply or Demand equations used in Question 3.

Draw a new diagram and label the minimum wage.

Calculate and show on the diagram:

i) Consumer/firm surplus

ii) Producer/worker surplus

iii) Total surplus

iv) Resources lost in job search

7. In answering the following questions, base your responses on what has happened to the relevant surplus.

Following the introduction of the minimum wage explain if:

i) Firms are better off?

ii) Workers are better off?

iii) Society is better off?

8.Now assume that the resources lost in job search calculated in Q6 are actually captured by producers (workers). In other words, now assume that no resources at all are lost in job search activity.

Re-calculate the following:

i) Consumer/firm surplus

ii) Producer/worker surplus

iii) Total surplus

9.Based on your re-calculations in Q8, is the conclusions reported in Q7 change?

10.Consider your responses in Q7 and Q9. From a consequentialist perspective that has as its objective allocative efficiency, is the introduction of a minimum wage ethically justified? Explain.

11.Consider your responses in Q7 and Q9. From a consequentialist perspective that has as its objective improving the standard of living of unskilled workers, is the introduction of a minimum wage ethically justified? Explain.

12.From a deontological ethical framework, construct an argument either in favour of a minimum wage or against it.

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