Practice Exam Questions Chapter 3b Notes

Question 1

What is the elasticity of demand?

Answer 1

The elasticity of demand is the percent change in labour demanded divided by the percent change in the wage.

Question 2

How does the amount of unemployment vary with the elasticity of labour demand? When elasticity of demand is low(in absolute value), i.e. inelastic

Answer 2

Labour demand is not very responsive to increases in minimum wage

Question 3

How does the amount of unemployment vary with the elasticity of labour demand? When elasticity of demand is high(in absolute value), i.e. elastic

Answer 3

there be substantial unemployment effects when the minimum wage is increased
- there will be very large unemployment effects from increasing the minimum wage

Question 4

What are the equilibrium wage and employment effects of the removal of a ‘binding’ minimum wage?

Answer 4

the removal of a minimum wage would increase employment and decrease the wage

Question 5

What is a binding wage?

Answer 5

• if minimum wage is set above equilibrium wage
• a binding minimum wage creates unemployment
• It also provides a wage that is higher than what firms would pay without a minimum wage