The United States of America’s national minimum wage is currently at $7.25 per hour for most occupations in the private sector. Over the past several years, support for an increase in the minimum wage has come from a wide variety of sources. Many of those who support an increase in the minimum wage believe this is one way the government should exercise its social responsibility in an attempt to reduce poverty. The following items address the idea of raising the minimum wage from the current federal minimum of $7.25 per hour.
1) Minimum wage is a price floor, so discuss an increase in the minimum wage from a supply and demand standpoint, making sure to address the concept of surplus with respect to the quantity of labor supplied and the quantity of labor demanded that is generated by this price floor ( show your graphs) 25 points
2) What will be the impact on the prices of the products produced by workers working at or near the minimum wage level, and how will this affect overall consumer purchasing? 25 points
3) Discuss any potential changes in the incentives for low-skilled workers to increase their human capital, and for employers to substitute capital inputs (technology and automation) for labor. 10 points
4) What might be the impact on government spending on entitlements such as welfare, food stamps, and unemployment compensation in light of the fact that changes in the minimum wage can create changes in unemployment and underemployment? 25 points
Based on your responses, do you believe that the minimum wage should be raised, lowered, remain as it currently is, or be altogether eliminated? Explain your answer, and make sure to address any social responsibility the government should have regarding the well-being of its citizens with respect to the setting of wages in the private sector. 15 points
Consider a small country that exports steel. Suppose that a “pro-trade” government decides to subsidize the export of steel by paying a certain amount for each ton sold abroad.
How does this export subsidy affect the
a. domestic price of steel,
b. the quantity of steel produced,
c. the quantity of steel consumed, and
d. the quantity of steel exported?
How does it affect
a. consumer surplus,
b. producer surplus,
c. government revenue, and
d. total surplus?
Is it a good policy from the standpoint of economic efficiency? (Hint: the analysis of an export subsidy is similar to the analysis of a tariff)
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