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EXPLANATION/ CHARACTERISTICS /
RESULTS
- Assume that without the minimum
wage we have a competitive product market and a competitive
labor market
- Without the minimum wage Q1 will be
employed at a wage of W1 and the labor market is
allocatively efficient (MRP = MRC and VMP = W).
- Results with a minimum wage set at
W2:
- Higher wage (W2 instead
of W1)
-Fewer employed (Q2 instead of Q1;
where MRP = MRCnew)
- Allocative inefficiency. Fewer
workers than the efficient (competitive) quantity will be
employed.
- Similar to what happens with an
effective price floor in the product market.
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