Price Floors and Minimum Wage Quiz

12 Questions

What is the primary purpose of a price floor in a market?

To legally restrict trading below a specified price

In a labour market, what happens if the minimum wage is set below the equilibrium wage rate?

It has no effect on the market

What occurs when the minimum wage is set above the equilibrium wage rate in a labour market?

Unemployment is created due to a surplus of labour

How does a minimum wage impact the quantity of labour hired compared to an unregulated labour market?

Less labour is hired at the minimum wage

Why does setting the minimum wage above the equilibrium wage rate lead to unemployment?

The legal wage rate cannot eliminate the surplus

What does the supply of labour in a market measure?

The marginal social cost of labour to workers

What is the purpose of a minimum wage set above the equilibrium wage, according to the text?

To reduce job search efforts

How does an increase in minimum wage potentially affect employment, as mentioned by some economists?

By making workers more productive and conscientious

Who bears the burden of a tax when the price of an item rises by the full amount of the tax?

Buyers

When an item is taxed and its price rises by a lesser amount than the tax, who shares the burden of the tax?

Both buyers and sellers equally

In the scenario where a tax on cigarettes is imposed on sellers, who ultimately pays a portion of the tax?

Only buyers

What happens to demand and supply when a tax is imposed on cigarettes according to the text?

Both demand and supply decrease

Study Notes

Price Floor and Minimum Wage

A price floor is a regulation that makes it illegal to trade at a price lower than a specified level.
When a price floor is applied to labor markets, it is called a minimum wage.
If the minimum wage is set below the equilibrium wage rate, it has no effect on the market.
If the minimum wage is set above the equilibrium wage rate, it creates a surplus of labor, leading to unemployment.
The quantity of labor hired at the minimum wage is less than the quantity that would be hired in an unregulated labor market.

Effects of Minimum Wage

A minimum wage leads to an inefficient outcome, where the quantity of labor employed is less than the efficient quantity.
The supply of labor measures the marginal social cost of labor to workers (leisure forgone).
The demand for labor measures the marginal social benefit from labor (value of goods produced).
A minimum wage set above the equilibrium wage decreases the quantity of labor employed, resulting in a deadweight loss.

Alternative View on Minimum Wage

Some economists argue that increases in the minimum wage can increase teenage employment.
According to this view, a higher wage makes workers more conscientious and productive, leading to lower unproductive labor turnover.

Tax Incidence

Tax incidence is the division of the burden of a tax between buyers and sellers.
The outcome of tax incidence does not depend on tax law.
When an item is taxed, its price might rise by the full amount of the tax, by a lesser amount, or not at all.
If the price rises by the full amount of the tax, buyers pay the tax.
If the price rises by a lesser amount, buyers and sellers share the burden of the tax.
If the price doesn't rise at all, sellers pay the tax.

Example of Tax Incidence

Suppose the provincial government raises the tax on the sale of cigarettes by $1.50 on a pack of 25 cigarettes.
The equilibrium price with no tax is $3.00 a pack.
With a tax on sellers, the supply decreases, and the market price paid by buyers rises to $4.00 a pack.
The price received by the sellers falls to $2.50 a pack.
In this case, buyers pay $1.00 of the tax, and sellers pay the other $0.50.